DP16044 Technology and the geography of the foreign exchange market

Author(s): Barry Eichengreen, Massimo Ferrari, Romain Lafarguette, Arnaud Mehl
Publication Date: April 2021
Keyword(s): Foreign exchange market, Geography, Submarine fiber-optic cables, technology
JEL(s): F30
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16044

We analyze the impact of technology on the production and trade in services, focusing on the location of foreign exchange transactions and the effect of submarine fiber-optic cable connections. Cable connections between local markets and major financial centers reduce the costs of trading currencies locally and increase the share of currency transactions taking place in the issuing country. But they also attenuate the effect of existing spatial frictions that prevent transactions from moving offshore to take advantage of agglomeration economies and thick-market advantages of major financial centers. In practice, this second effect dominates. Our estimates suggest that the advent of cable connections boosted the share in global turnover of London, the world's largest trading venue, by as much as one-third.