Discriminatory Pricing of Over-the-Counter Derivatives

63 Pages Posted: 10 Jan 2018 Last revised: 11 Jun 2020

See all articles by Harald Hau

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Sam Langfield

European Central Bank

Yannick Timmer

International Monetary Fund (IMF) - Research Department; International Monetary Fund (IMF) - Financial Studies Division

Multiple version iconThere are 3 versions of this paper

Date Written: December 16, 2017

Abstract

For the first time, new regulatory data allow precise measurement of price discrimination against non-financial clients in the FX derivatives market. Consistent with the theoretical literature, transaction costs vary systematically with measures of client sophistication. The median client pays 10.9 pips more than blue-chip companies due to its lower level of sophistication, which compares with a sample average effective spread of 6.9 pips. However, price discrimination is fully eliminated when clients trade electronically on multi-dealer platforms. We also document that less sophisticated clients incur additional costs when trading with their relationship bank and in fast-moving markets, but only for bilaterally negotiated contracts.

Keywords: Transaction costs, OTC markets, multi-dealer platforms, relationship trading

JEL Classification: G14, G18, D4

Suggested Citation

Hau, Harald and Hoffmann, Peter and Langfield, Sam and Timmer, Yannick, Discriminatory Pricing of Over-the-Counter Derivatives (December 16, 2017). Swiss Finance Institute Research Paper No. 17-70, Available at SSRN: https://ssrn.com/abstract=3099089 or http://dx.doi.org/10.2139/ssrn.3099089

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Yannick Timmer

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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