Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This study examines the impact of competition on bid-ask spreads in the spot foreign exchange market. We measure competition primarily by the number of dealers active in the market and find that bid-ask spreads decrease with an increase in competition, even after controlling for the effects of volatility. The expected level of competition is time varying, highly predictable, and displays a strong seasonal component that in part is induced by geographic concentration of business activity over the 24-hour trading day. Our estimates show that the expected addition of one more competing dealer lowers the average quoted spread by 1.7%. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.