Financial intermediation and the role of price discrimination in a two-tier market /

Though unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, the two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads.

• Main Author: Reitz, Stefan
• Other Authors: Schmidt, Markus A., Taylor, Mark P.
• Format: Book
• Language: English
• Published: Frankfurt am Main : Deutsche Bundesbank, 2009
• Series: Discussion paper (Deutsche Bundesbank). Series 1: economic studies no. 13/2009
• Subjects: INTERMEDIACION FINANCIERA; ESTRUCTURA DEL MERCADO; DISCRIMINACION DE PRECIOS; TIPO DE CAMBIO; ALEMANIA; DESINTERMEDIACION FINANCIERA; CAMBIO EXTERIOR
• Online Access: https://www.econstor.eu/bitstream/10419/27667/1/200913dkp.pdf
• Physical Description: 27 p.
• Bibliography: Bibliografía: p. 18-20.
• ISBN: 9783865585202