Forex in the Future

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Forex in the Future
Global Asset Allocation and Stock Selection

• Campbell R. Harvey
• Duke University, Durham, NC USA
• National Bureau of Economic Research, Cambridge
  MA USA
• http//www.duke.edu/charvey

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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!
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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

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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

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Forex in the Future-----Trading cost
Frequency in
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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!

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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

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Forex in the Future-----New forces in the market

• Two consoritia FXall and Atriax
• Advantages
• Saves time in doing phone around
• Electronic execution

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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

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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

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Forex in the Future-----New forces in the market

• One consoritia
• Atriax goes out of business in 2002

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Forex in the Future-----New forces in the market

• Others Currenex
• Advantages
• Independence

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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)

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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.
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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

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Type 1 unit
Bank 1
Bank 2
Client
Forexster
Bank 3
Bank 4
Bank 5
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Type 1 unit
Bank 1
Reverse auction
Bank 2
Client
Forexster
Bank 3
Bank 4
Bank 5
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Type 2 unit
Client 1
Client 2
Client 3
Client 4
Forexster
Bank
Client 5
Client 6
Client 7
Client 8
Client 9
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Type 2 unit
Client 1
Client 2
Client 3
Client 4
Forexster
Direct trade
Bank
Client 5
Client 6
Client 7
Client 8
Client 9
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Type 2
Type 1
Bank
Client
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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