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Rev Fin 1999; 12:61-93
© 1999 the Society for Financial Studies

Article

FX spreads and dealer competition across the 24-hour trading day

RD Huangz and RW Masulis
Owen Graduate School of Management, 401 21st Avenue South, Vanderbilt University, Nashville, TN 37203, UK
z Corresponding author

Abstract

This study examines the impact of competition on bid-ask spreads in the spot foreign exchange market. We measure competition primarily by the number of dealers active in the market and find that bid-ask spreads decrease with an increase in competition, even after controlling for the effects of volatility. The expected level of competition is time varying, highly predictable, and displays a strong seasonal component that in part is induced by geographic concentration of business activity over the 24-hour trading day. Our estimates show that the expected addition of one more competing dealer lowers the average quoted spread by 1.7%


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