Do foreign exchange markets serve their customers well?

The role of customers (i.e., end-users of currency, not banks/intermediaries) in foreign exchange (FX) markets has to a large extent been neglected in the literature, for at least two reasons: (1) Due to the lack of regulations, like disclosure requiremen ts, it has proven extremely hard to get data on customer transactions. (2) If markets are sufficiently competitive and deep, customers can buy and sell their desired amounts of currency at fair prices without large transaction costs. However, without data we do not really know if this is the case. Recent news suggests that we should be wary. International banking has increasingly been dominated by a few banks. In the FX market, investments in trading platforms may constitute a severe barrier to entry. M ore importantly, last summer we learned from the financial press that the "fix"-price, the main benchmark price for customers, may have been manipulated by traders in the major banks. This is the FX-version of the LIBOR-scandal. In cooperation with the N orges Bank we will have access to intra-day data on FX trading in the interdealer market, where the fix-price is determined, over a long time-period and for several currencies. Armed with these data we will study developments of prices and trades, and tes t if the prices can be result of manipulation. In cooperation with the Sveriges Riksbank we will have access to a data set on individual customer transaction with major banks. This will enable us to compare the prices and transaction costs that customers face with those from the interbank market. Billions of dollars are each day settled at the fix (e.g by the NBIM). The fix is also the most commonly used FX-rate for academic research. Together with a deeper understanding of how the end-user demand for currency is satisfied, this project has clear value for the public, authorities and academics. The nature of the fix-scandal requires that the project proceed quickly.