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					   Global Asset Allocation and Stock Selection



     Forex in the Future


            Campbell R. Harvey
            Duke University, Durham, NC USA
National Bureau of Economic Research, Cambridge MA USA

             http://www.duke.edu/~charvey


                                                         1
Forex in the Future:
-----Current landscape
Market
$1.500 trillion in forex transacted every day*

$0.020 trillion stocks transacted on NYSE

*Does not include forwards, swaps, and options!



                                                  2
Forex in the Future:
-----Current landscape
Trading
Basic technology has not changed in decades
(“request for quote” method)

• Phone around to banks/investment banks and
  get a quotation
• Take the best price
                                              3
Forex in the Future:
-----Trading cost
Components
• Clearing fee (say on 1 million €) $9-25
• Bid-ask spread largest component
  – 90% of the time 2-5 pips ($200-500)
  – median is 5 pips




                                            4
Forex in the Future:
-----Trading cost
   Frequency in %
      50
      45
      40
      35
      30
      25
      20
      15
      10
       5
       0
          0 1 2     3   4   5   6 7   8 9 10 11
              Spread in pips for EUR-USD          5
Forex in the Future:
-----Trading cost
Why are trading costs so high?
Banks provide:
• Clearing
• Credit monitoring
• Bear inventory risk
Plus, they make a pile of money!

                                   6
Forex in the Future:
-----New forces in the market
Two consoritia: FXall and Atriax
Similar product, different partners
• Using the Internet, press a button and get the
  best two way quote (bid-ask) from consortia
  members
• FXall has been around one year
• Atriax launched in July 2001
                                               7
Forex in the Future:
-----New forces in the market
Two consoritia: FXall and Atriax
Advantages:
• Saves time in doing phone around
• Electronic execution




                                     8
Forex in the Future:
-----New forces in the market
Two consoritia: FXall and Atriax
Disadvantages:
• Does not necessarily reduce spread cost
• Makes collusion among consortium partners a
  possibility (current DOJ investigation)
• No cross quotes between the two consortia

                                          9
Forex in the Future:
-----New forces in the market
Two consoritia: FXall and Atriax
Disadvantages:
Generally, it is a bad business idea to request a
 quote from a consortium – you are asking for
 trouble.
Overall, it is the same old market facilitated with
 the Internet

                                               10
Forex in the Future:
-----New forces in the market
One consoritia:
Atriax goes out of business in 2002




                                      11
Forex in the Future:
-----New forces in the market
Others: Currenex
Advantages:
• Independence




                                12
Forex in the Future:
-----New forces in the market
Others: Currenex
Disadvantages:
• Must take bid or ask
• Does not accommodate a limit order book (like
  NASDAQ trading)



                                           13
Forex in the Future:
-----New forces in the market
Others: Currenex?
London, Jan. 16, 2003 (Bloomberg) -- Currenex Inc.
  Chief Executive Lori Mirek left the electronic
  currency-trading company, Financial News said,
  citing no one.
     Mirek departed after at least three other
  executives left in recent months, the weekly
  financial newspaper reported on its Web site.
  Mirek previously worked at America Online Inc. and
  Netscape Communications Corp.
     Rochel Velasco, a spokeswoman for Currenex,
  said the companyhad no immediate comment.
                                                14
Forex in the Future:
-----New forces in the market
Reverse auction
Forexster.com
• Applied for several patents for a reverse
  auction type of system for FX trading
• Two types of systems
  – Type 1 client communicating to many banks
  – Type 2 many clients communicating with bank

                                                  15
         Type 1 unit
                            Bank 1



                            Bank 2


Client          Forexster
                            Bank 3



                            Bank 4



                            Bank 5
                                     16
         Type 1 unit         Bank 1


           Reverse auction
                             Bank 2


Client           Forexster
                             Bank 3



                             Bank 4



                             Bank 5
                                      17
           Type 2 unit
Client 1
Client 2

Client 3
Client 4
            Forexster
Client 5                 Bank

Client 6

Client 7

Client 8
Client 9                   18
                          Type 2 unit
               Client 1
               Client 2

               Client 3
               Client 4
Direct trade




                           Forexster
               Client 5                 Bank

               Client 6

               Client 7

               Client 8
               Client 9                   19
Type 2




         Type 1




                  Bank


                  Client
                     20
21
22
23
24
25
26
27
Forex in the Future:
-----New forces in the market
Further reading
• Ben Wright, “Unlocking the C2C forex riddle”
  Euromoney.com July 2001
• Jennifer Morris “Forex goes into future shock” Euromoney
  October 2001
• Joff Wild “Europe lags US in business-method patents”
  Euromoney March 2002
• Tessa Oakley “Forexster throws down client-to-client patent
  challenge” Euromoney March 2002

                                                          28

				
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posted:5/17/2012
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