【Abstract】

Chinese interbank foreign exchange trading was originally conducted through a centralized, anonymous limit order book (LOB). We determine the impact of the introduction of a parallel decentralized over-the-counter (OTC) market. We find that: (1) most trading migrated to the OTC, (2) the LOB price function is upward-sloping versus the OTC price function is downward-sloping, and (3) the LOB market has a single price function versus the OTC market has multiple price functions. Next, we develop a theoretical model of parallel markets that can simultaneously explain all of these empirical findings. We test a new model prediction and find support.

【Keywords】

Market structure, Over-the-counter, Limit-order book, FX market

【Authors】

Craig W. Holden, Kelly School of Business, Indiana University

Lu Dong, IMI Research Fellow, School of Finance, Renmin University of China

Volodymyr Lugovskyy and Daniela Puzzello, Department of Economics, Indiana University