Article2021

Discriminatory Pricing of Over-the-Counter Derivatives

Harald Hau · Peter Hoffmann · Sam Langfield · Yannick Timmer

60 citations0/0 files storedManagement Science

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Financial Markets and Investment Strategies Banking stability, regulation, efficiency Risk Management in Financial Firms

Abstract

For the first time, new regulatory data allow precise measurement of price discrimination against nonfinancial clients in the foreign exchange derivatives market. Consistent with the theoretical literature, transaction costs vary systematically with measures of client sophistication. The median client pays 10.9 pips more than blue-chip companies because of its lower level of sophistication, which compares with a sample average effective spread of 6.9 pips. However, price discrimination is fully eliminated when clients trade electronically on multidealer platforms. We also document that less sophisticated clients incur additional costs when trading with their relationship bank and in fast-moving markets, but only for bilaterally negotiated contracts. This paper was accepted by Haoxiang Zhu, finance.

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References

1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1993On the Determinants of Corporate Hedging 2004Over-the-Counter Markets 2007Corporate Bond Market Transaction Costs and Transparency 2000Prices Rise Faster than They Fall 2018Deviations from Covered Interest Rate Parity 2003How much do firms hedge with derivatives?2006Market transparency, liquidity externalities, and institutional trading costs in corporate bonds☆

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