Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market

72 Pages Posted: 20 Jan 2016 Last revised: 19 Apr 2023

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Romain Lafarguette

International Monetary Fund; European Central Bank (ECB)

Arnaud Mehl

European Central Bank (ECB)

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Date Written: January 2016

Abstract

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.

Suggested Citation

Eichengreen, Barry and Lafarguette, Romain and Mehl, Arnaud, Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market (January 2016). NBER Working Paper No. w21884, Available at SSRN: https://ssrn.com/abstract=2717295

Barry Eichengreen (Contact Author)

University of California, Berkeley ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Romain Lafarguette

International Monetary Fund ( email )

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European Central Bank (ECB) ( email )

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Arnaud Mehl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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