The choice of direct dealing or electronic brokerage in foreign exchange trading.
详细信息
文摘
Central bank surveys taken in 2001 indicate that the use of electronic brokerage systems account for the following shares of inter-dealer spot foreign exchange market turnover: New York, 54%; London, 66%; and Japan, 48%. This share has grown from zero in the early 1990s and is up sharply from that reported in the last surveys taken in 1998. While the surveys point out the rapid growth of electronic brokers as an important foreign exchange (FX) institution, there has been no research on the microstructure issues that lead traders to choose electronic brokerage (EB) over the historically dominant, and still quite relevant, institution of direct dealing where bilateral conversations (either telephone or electronic) occur between two FX traders and a deal is struck. The dissertation provides theory and empirical analysis to further the understanding of the choice of trading venue in foreign exchange.;The theoretical model analyzes the choice of trading venue for “large” and “small” traders. The theory illustrates the importance of asymmetric information, transaction costs, and speed of execution. The most likely outcome is that direct dealing is used for large trades while the EB is utilized for small trades.;The empirical analysis utilizes data on orders submitted to the Reuters 2000-2 EB system. The empirical work focuses on the duration of time between order submission and finding a match for trade execution. An autoregressive conditional duration (ACD) model is specified using the Burr distribution. Given the price competitiveness of an order, duration is increasing in order size. Because of this longer duration for large orders on the EB, large traders will prefer the direct dealing market to the brokerage market. The empirical analysis also shows that the greater the depth of the market, the shorter the duration of orders of all sizes. This result is consistent with traders clustering in time to submit orders so as to increase the probability of finding a match.