I was going to discuss a paper released by the Bank of England late last week entitled A discrete choice model for large heterogeneous panels with interactive fixed effects with an application to the determinants of corporate bond issuance but not only was I asleep by the end of the title, I was also taught never to discuss things I don't understand – and I don't even understand what a “discrete choice” is!
Instead I want to continue last week’s theme of the relationships in FX, this time looking at the choices around the make up of aggregators.
When clients are looking at prices in an aggregator they could see a bunch of quotes that appear to be identical to one another.
But as Roel Oomen, managing director, electronic FX spot trading at Deutsche Bank, explains, this does not mean that the transactions costs for dealing on each of those quotes is exactly the same.
This is because rejection rates can vary, the liquidity that’s shown at these quotes can vary, and the risk management style of the liquidity providers (LPs) in the aggregator might vary, with some externalising the risk and other internalising it. But how to tell the two apart?