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Asymetric Information and the Foreign-Exchange Trades of Global Custody Banks

Carol Osler (), Tanseli Savaser and Thang Tan Nguyen
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Carol Osler: International Business School, Brandeis University
Thang Tan Nguyen: International Business School, Brandeis University

No 55, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: We analyze currency trading between custody banks and their client funds, a trading situation notable for extreme opacity and ongoing legal disputes about reputedly high markups. We propose a “shrouding” model of liquidity provision in which prices are set relative to the day’s extrema to preserve client uncertainty about execution costs. Using the complete 2006 currency trading record of a custody bank, we support this hypothesis with numerous tests. Our analysis of the client funds indicates that they recognize the high costs of standard custodial trades and raises the possibility that they trade through custodians to shroud execution-cost information from underlying investors.

Keywords: Bid-ask Spread; Exchange Rates; Microstructure; Shrouding; Custody Bank (search for similar items in EconPapers)
JEL-codes: G15 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2012-11
New Economics Papers: this item is included in nep-cfn and nep-mst
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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP55.pdf First version, 2012 (application/pdf)

Related works:
Working Paper: Asymmetric Information and the Foreign-Exchange Trades of Global Custody Banks (2011) Downloads
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