Reitz, Stefan and Schmidt, Markus and Taylor, Mark P. (2009): Financial Intermediation and the Role of Price Discrimination in a Two-Tier Market.
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Though unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, the two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads.
|Item Type:||MPRA Paper|
|Original Title:||Financial Intermediation and the Role of Price Discrimination in a Two-Tier Market|
|Keywords:||foreign exchange; market microstructure; pricing behavior|
|Subjects:||F - International Economics > F3 - International Finance > F31 - Foreign Exchange|
|Depositing User:||Stefan Reitz|
|Date Deposited:||10. Jun 2009 05:53|
|Last Modified:||12. Feb 2013 01:08|
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