Network structure and pricing in the FX market

Joel Hasbrouck and Richard M. Levich

Journal of Financial Economics, 2021, vol. 141, issue 2, 705-729

Abstract: We construct the network, centrality measures, and attributions of trading profits for a sample of CLS Bank settlement data that spans diverse currency pairs, participants, and execution platforms. We define an average centrality differential as the return to the more-central counterparty in the trade. Estimates imply that the more-central counterparty receives a higher return, and that this differential increases as the counterparties’ centralities diverge. These two results are consistent with a pervasive centrality premium. This premium may reflect bargaining power, but we also find evidence that the premium is partially offset by losses that central agents incur in supplying liquidity.

Keywords: Foreign exchange; CLS bank; Dealer networks; Trading costs; Centrality (search for similar items in EconPapers)
JEL-codes: F31 G15 G23 L14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:2:p:705-729

DOI: 10.1016/j.jfineco.2021.04.013

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