Financial intermediation and the role of price discrimination in the foreign exchange market

Stefan Reitz, Markus A. Schmidt and Mark Taylor

The European Journal of Finance, 2015, vol. 21, issue 8, 629-645

Abstract: Foreign exchange trading is performed in opaque and decentralized markets. 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 develop a theoretical pricing model that accounts for market-power considerations and analyze a database of the trades of a foreign exchange market maker. We find that the market maker generally exerts low bargaining power vis-á-vis 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.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:21:y:2015:i:8:p:629-645

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DOI: 10.1080/1351847X.2013.830139

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