English, Article, Journal or magazine article edition: Financial intermediation and the role of price discrimination in a two-tier market Reitz, Stefan; Schmidt, Markus A.; Taylor, Mark P.

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Bookmark: http://trove.nla.gov.au/version/122275
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Financial intermediation and the role of price discrimination in a two-tier market
Author
  • Reitz, Stefan
  • Schmidt, Markus A.
  • Taylor, Mark P.
Physical Description
  • preprint
Notes
  • RePEc:pra:mprapa:15602
  • 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.
  • foreign exchange, market microstructure, pricing behavior
  • RePEc:zbw:bubdp1:7582
Language
  • English
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