FX Spreads and Dealer Competition across the 24-Hour Trading Day

Roger D Huang and Ronald Masulis

The Review of Financial Studies, 1999, vol. 12, issue 1, 61-93

Abstract: This study examines the impact of competition on bid-ask spreads in the spot foreign exchange market. We measure competition primarily by the number of dealers active in the market and find that bid-ask spreads decrease with an increase in competition, even after controlling for the effects of volatility. The expected level of competition is time varying, highly predictable, and displays a strong seasonal component that in part is induced by geographic concentration of business activity over the 24-hour trading day. Our estimates show that the expected addition of one more competing dealer lowers the average quoted spread by 1.7%. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1999
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The Review of Financial Studies is currently edited by Itay Goldstein

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