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Asymetric Information and the Foreign-Exchange Trades of Global Custody Banks

Author

Listed:
  • Carol Osler

    (International Business School, Brandeis University)

  • Tanseli Savaser

    (Williams College)

  • Thang Tan Nguyen

    (International Business School, Brandeis University)

Abstract

We analyze currency trading between custody banks and their client funds, a trading situation notable for extreme opacity and ongoing legal disputes about reputedly high markups. We propose a “shrouding” model of liquidity provision in which prices are set relative to the day’s extrema to preserve client uncertainty about execution costs. Using the complete 2006 currency trading record of a custody bank, we support this hypothesis with numerous tests. Our analysis of the client funds indicates that they recognize the high costs of standard custodial trades and raises the possibility that they trade through custodians to shroud execution-cost information from underlying investors.

Suggested Citation

  • Carol Osler & Tanseli Savaser & Thang Tan Nguyen, 2012. "Asymetric Information and the Foreign-Exchange Trades of Global Custody Banks," Working Papers 55, Brandeis University, Department of Economics and International Business School.
    • Handle: RePEc:brd:wpaper:55
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    Cited by:

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    2. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    3. Carol Osler & Xuhang Wang, 2012. "The Microstructure of Currency Markets," Working Papers 49, Brandeis University, Department of Economics and International Business School.

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    More about this item

    Keywords

    Bid-ask Spread; Exchange Rates; Microstructure; Shrouding; Custody Bank;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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