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 (“request for quote” method) Phone around to banks/investment banks and get a quotation Take the best price

4. 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 ($200-500) –median is 5 pips

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

6. 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. 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. 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. 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. 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. 11 Forex in the Future: -----New forces in the market One consoritia: Atriax goes out of business in 2002

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

13. 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. 14 Forex in the Future: -----New forces in the market Others: Currenex? London, Jan. 16, 2003 (Bloomberg) -- Currenex Inc. Chief Executive Lori Mirek left the electronic currency-trading company, Financial News said, citing no one. Mirek departed after at least three other executives left in recent months, the weekly financial newspaper reported on its Web site. Mirek previously worked at America Online Inc. and Netscape Communications Corp. Rochel Velasco, a spokeswoman for Currenex, said the companyhad no immediate comment.

15. 15 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

16. 16 ClientForexster Bank 2 Bank 3 Bank 4 Bank 5 Bank 1 Type 1 unit

17. 17 ClientForexster Bank 2 Bank 3 Bank 4 Bank 5 Bank 1 Reverse auction Type 1 unit

18. 18 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Client 8 Client 9 Client 1 Bank Forexster Type 2 unit

19. 19 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

20. 20 Bank Client Type 1 Type 2

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28. 28 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