1. 1 Forex in the Future Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey Global Asset Allocation and Stock Selection

2. 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. 3 Forex in the Future: -----Current landscape Trading Basic technology has not changed in decades Phone around to banks/investment banks and get a quotation Take the best price

4. 4 Forex in the Future: -----Trading technology Trading Basic technology has not changed in decades Phone around to banks/investment banks and get a quotation Take the best price

5. 5 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

6. 6 Forex in the Future: -----Trading cost Frequency in %

7. 7 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!

8. 8 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

9. 9 Forex in the Future: -----New forces in the market Two consoritia: FXall and Atriax Advantages: Saves time in doing phone around Electronic execution

10. 10 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 Basically, it is the same old market facilitated with the Internet

11. 11 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

12. 12 ClientForexster Bank 2 Bank 3 Bank 4 Bank 5 Bank 1 Type 1 unit

13. 13 ClientForexster Bank 2 Bank 3 Bank 4 Bank 5 Bank 1 Reverse auction Type 1 unit

14. 14 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Client 8 Client 9 Client 1 Bank Forexster Type 2 unit

15. 15 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Client 8 Client 9 Client 1 Bank Forexster Direct trade Type 2 unit

16. 16 Bank Client Type 1 Type 2

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24. 24 Forex in the Future: -----New forces in the market Further reading Ben Wright, “Unlocking the C2C forex riddle” Euromoney on-line, July 25, 2001