Discriminatory Pricing of Over-the-Counter Derivatives

Author/Editor:

Harald Hau ; Peter Hoffmann ; Sam Langfield ; Yannick Timmer

Publication Date:

May 7, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.

Series:

Working Paper No. 19/100

English

Publication Date:

May 7, 2019

ISBN/ISSN:

9781498303774/1018-5941

Stock No:

WPIEA2019100

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

45

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