The Future of the Foreign Exchange Market
The Future of the Foreign Exchange Market
Abstract
This paper addresses the future of the foreign exchange market using two organizing(and provocative) ideas. One pertains to the market’s institutional structurthe other to its information structure. The first organizing idea is that thestructure of currency markets is driven primarily by the management of credit risk. This contrasts with drivers identified by microstructure theory (such as management of market risk, attenuation of asymmetric information, and entry barriers). The second organizing idea is that price variation in spot currency markets is driven primarily by dispersed information. This too contrasts with the orthodox view, under which exchange rates are determined from public information.
The Future of the Foreign Exchange Market
This paper addresses the future of the foreign exchange market using two organizing (and provocative) ideas. At the risk of jumping the gun, let me state them right off:
(1) Market Structure: Current organization of the largest spot currency markets is driven primarily by the management of credit risk, as opposed to drivers identified in microstructure theory (such as management of market risk, attenuation of asymmetric information, and entry barriers).
(2) Information Structure: Price variation in spot currency markets is drivenprimarily by dispersed information, as opposed to the orthodox assumption of public information.
Both ideas are vital to understanding the foreign exchange (FX) market’s future evolution, as we shall endeavor to show, :-
* Consider the first of these ideas and why I consider it provocative. (Whether it is true is addressed in the following section.) This requires some perspective on the field of microstructure finance. Market design is a central issue within this field, and, importantly, it is through the lens of microstructure finance that people address questions of market structure. Yet the field pays little attention to
Abstract
This paper addresses the future of the foreign exchange market using two organizing(and provocative) ideas. One pertains to the market’s institutional structurthe other to its information structure. The first organizing idea is that thestructure of currency markets is driven primarily by the management of credit risk. This contrasts with drivers identified by microstructure theory (such as management of market risk, attenuation of asymmetric information, and entry barriers). The second organizing idea is that price variation in spot currency markets is driven primarily by dispersed information. This too contrasts with the orthodox view, under which exchange rates are determined from public information.
The Future of the Foreign Exchange Market
This paper addresses the future of the foreign exchange market using two organizing (and provocative) ideas. At the risk of jumping the gun, let me state them right off:
(1) Market Structure: Current organization of the largest spot currency markets is driven primarily by the management of credit risk, as opposed to drivers identified in microstructure theory (such as management of market risk, attenuation of asymmetric information, and entry barriers).
(2) Information Structure: Price variation in spot currency markets is drivenprimarily by dispersed information, as opposed to the orthodox assumption of public information.
Both ideas are vital to understanding the foreign exchange (FX) market’s future evolution, as we shall endeavor to show, :-
* Consider the first of these ideas and why I consider it provocative. (Whether it is true is addressed in the following section.) This requires some perspective on the field of microstructure finance. Market design is a central issue within this field, and, importantly, it is through the lens of microstructure finance that people address questions of market structure. Yet the field pays little attention to