1. Forex in the Future Campbell R. Harvey
Global Asset Allocation and Stock Selection
Forex in the Future
Campbell R. Harvey
Duke University, Durham, NC USA
National Bureau of Economic Research, Cambridge MA USA

2. 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!

3. 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

4. Forex in the Future: -----Trading cost
Components
Clearing fee (say on 1 million €) $9-25
Bid-ask spread largest component
90% of the time 2-5 pips ($ )
median is 5 pips

5. Forex in the Future: -----Trading cost
Frequency in %

6. 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!

7. 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

8. Forex in the Future: -----New forces in the market
Two consoritia: FXall and Atriax
Advantages:
Saves time in doing phone around
Electronic execution

9. 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

10. 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

11. Forex in the Future: -----New forces in the market
One consoritia:
Atriax goes out of business in 2002

12. Forex in the Future: -----New forces in the market
Others: Currenex
Advantages:
Independence

13. 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)

14. 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

15. Type 1 unit
Bank 1
Bank 2
Client
Forexster
Bank 3
Bank 4
Bank 5

16. Type 1 unit Bank 1 Reverse auction Bank 2 Client Forexster Bank 3

17. Type 2 unit Client 1 Client 2 Client 3 Client 4 Forexster Bank

18. Type 2 unit Client 1 Client 2 Client 3 Client 4 Direct trade Forexster
Bank
Client 6
Client 7
Client 8
Client 9

19. Type 2
Type 1
Bank
Client

27. 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