Shrouding and the Foreign Exchange Trades of Global Custody Banks

Carol Osler () and Tanseli Savaser
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Carol Osler: Brandeis University

No 118, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: Custodial forex trades generally have far higher bid-ask spreads than regular OTC trades. We develop a model of custodial liquidity provision and test it using trade records from a global custody bank. Custodial dealers set high markups and “shroud” them by exploiting their clients’ limited access to information. Market opacity becomes endogenous as custodial dealers benchmark prices to the day’s high or low (as relevant) rather than the currency’s true value. A predicted kink in the relation between client price and the interbank price is evident in scatterplots and confirmed by regressions. Custodial dealers also shroud by delaying trades.

Pages: 48 pages
Date: 2018-01
New Economics Papers: this item is included in nep-mon and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:118

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