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dc.contributor.authorReitz, Stefanen_US
dc.contributor.authorSchmidt, Markus A.en_US
dc.contributor.authorTaylor, Mark P.en_US
dc.description.abstractThough unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, the two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads.en_US
dc.publisher|aKiel Institute for the World Economy (IfW) |cKielen_US
dc.relation.ispartofseries|aKiel Working Paper |x1794en_US
dc.subject.keywordforeign exchangeen_US
dc.subject.keywordmarket microstructureen_US
dc.subject.keywordpricing behavioren_US
dc.titleFinancial intermediation and the role of price discrimination in a two-tier marketen_US
dc.typeWorking Paperen_US

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