FX spreads and dealer competition across the 24-hour trading day

This study examines the impact of competition on bid-ask spreads in the spo t foreign exchange market. We measure competition primarily by the number o f dealers active in the market and find that bid-ask spreads decrease with an increase in competition, even after controlling for the effects of volat ility. The expected level of competition is time varying, highly predictabl e, and displays a strong seasonal component that in part is induced by geog raphic concentration of business activity over the 24-hour trading day. Our estimates show that the expected addition of one more competing dealer low ers the average quoted spread by 1.7%,