Price discrimination in the FX market and the prediction of corporate markups

Abstract

This paper explores price discrimination in the foreign exchange market and the explanation of corporate markups by studying currency trades of Scandinavian corporations. The study takes advantage of unique data, including detailed information on individual clients and the relevant dealer, enabling us to research price discrimination on a client-by-client level. We perform empirical analysis to establish a relationship between different variables and the applied markup. We find that corporate clients can achieve lower trading costs by having several counterparties, trading more frequently, trading in larger volumes, and obtaining information. Furthermore, we conclude that dealers rationally exercise price discrimination based on customer characteristics and between types of customers, where perceived market sophistication is the primary driver.