e-Forex: Why you need independent data to differentiate between execution processes
All transaction costs can be more accurately defined as search costs. In over the counter (OTC) markets, such as Foreign Exchange, the fair price is hidden. To discover the best available price participants must deploy resources (search) to achieve a good deal. The FX market is de-centralised, or fragmented. This means the market clearing price cannot be inferred from individual market quotes. At what point can market participants determine whether they have identified the best available price and call the search off? This ambiguity creates opacity, producing a positive incentive for market-making, but also a negative incentive, from the customers’ perspective, of discriminatory pricing which treats customers unequally. Typically, it’s the smaller participants who get the worst deal.
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