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Forex in the Future

Campbell R. HarveyDuke University, Durham, NC USA

National Bureau of Economic Research, Cambridge MA USA

http://www.duke.edu/~charvey

Global Asset Allocation and Stock Selection

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Forex in the Future:

-----Current landscapeMarket

$1.500 trillion in forex transacted every day*

$0.020 trillion stocks transacted on NYSE

*Does not include forwards, swaps, and options!

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Forex in the Future:

-----Current landscapeTrading

Basic technology has not changed in decades

(request for quote method)

Phone around to banks/investment banks andget a quotation

Take the best price

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Forex in the Future:

-----Trading costComponents

Clearing fee (say on 1 million) $9-25

Bid-ask spread largest component

90% of the time 2-5 pips ($200-500)

median is 5 pips

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Forex in the Future:

-----Trading cost

0

5

1015

20

25

30

3540

45

50

0 1 2 3 4 5 6 7 8 9 10 11

Spread in pips for EUR-USD

Frequency in %

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Forex in the Future:

-----Trading costWhy are trading costs so high?

Banks provide:

Clearing

Credit monitoring

Bear inventory riskPlus, they make a pile of money!

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Forex in the Future:

-----New forces in the marketTwo consoritia: FXall and Atriax

Similar product, different partners

Using the Internet, press a button and get the

best two way quote (bid-ask) from consortia

members

FXall has been around one year

Atriax launched in July 2001

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Forex in the Future:

-----New forces in the marketTwo consoritia: FXall and Atriax

Advantages:

Saves time in doing phone around

Electronic execution

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Forex in the Future:

-----New forces in the marketTwo consoritia: FXall and Atriax

Disadvantages:

Does not necessarily reduce spread cost

Makes collusion among consortium partners a

possibility (current DOJ investigation)

No cross quotes between the two consortia

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Forex in the Future:

-----New forces in the marketTwo consoritia: FXall and Atriax

Disadvantages:

Generally, it is a bad business idea to request a

quote from a consortiumyou are asking for

trouble.

Overall, it is the same old market facilitated with

the Internet

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Forex in the Future:

-----New forces in the marketOne consoritia:

Atriax goes out of business in 2002

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Forex in the Future:

-----New forces in the marketOthers: Currenex

Advantages:

Independence

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Forex in the Future:

-----New forces in the marketOthers: Currenex

Disadvantages:

Must take bid or ask

Does not accommodate a limit order book (like

NASDAQ trading)

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Forex in the Future:

-----New forces in the marketOthers: Currenex?London, Jan. 16, 2003 (Bloomberg) -- Currenex Inc.

Chief Executive Lori Mirek left the electronic

currency-trading company, Financial News said,

citing no one.

Mirek departed after at least three other

executives left in recent months, the weekly

financial newspaper reported on its Web site.

Mirek previously worked at America Online Inc. and

Netscape Communications Corp.

Rochel Velasco, a spokeswoman for Currenex,

said the companyhad no immediate comment.

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Client Forexster

Bank 2

Bank 3

Bank 4

Bank 5

Bank 1Type 1 unit

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Client Forexster

Bank 2

Bank 3

Bank 4

Bank 5

Bank 1

Reverse auction

Type 1 unit

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Client 2

Client 3

Client 4

Client 5

Client 6

Client 7

Client 8

Client 9

Client 1

BankForexster

Type 2 unit

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Client 2

Client 3

Client 4

Client 5

Client 6

Client 7

Client 8

Client 9

Client 1

BankForexster

Directtrade

Type 2 unit

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Bank

Client

Type 1

Type 2

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Forex in the Future:

-----New forces in the marketFurther reading Ben Wright, Unlocking the C2C forex riddle

Euromoney.com July 2001 Jennifer Morris Forex goes into future shock Euromoney

October 2001

Joff Wild Europe lags US in business-method patents

Euromoney March 2002 Tessa Oakley Forexster throws down client-to-client patent

challenge Euromoney March 2002