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Discriminatory Pricing of Over-the-Counter Derivatives

Harald Hau, Peter Hoffmann, Sam Langfield () and Yannick Timmer
Additional contact information
Harald Hau: University of Geneva, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute)
Yannick Timmer: Trinity College (Dublin)

No 17-70, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: New regulatory data reveal extensive discriminatory pricing in the foreign exchange derivatives market, in which dealer-banks and their non-financial clients trade over-the-counter. After controlling for contract characteristics, dealer fixed effects, and market conditions, we find that the client at the 75th percentile of the spread distribution pays an average of 30 pips over the market mid-price, compared to competitive spreads of less than 2.5 pips paid by the bottom 25% of clients. Higher spreads are paid by less sophisticated clients. However, trades on multi-dealer request-for-quote platforms exhibit competitive spreads regardless of client sophistication, thereby eliminating discriminatory pricing.

Keywords: Dealer spreads; information rents; RFQ platforms; corporate hedging (search for similar items in EconPapers)
JEL-codes: G14 G18 D4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2017-12
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Related works:
Working Paper: Discriminatory Pricing of Over-The-Counter Derivatives (2017) Downloads
Working Paper: Discriminatory pricing of over-the-counter derivatives (2017) Downloads
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