The Global Configuration of a Speculative Trading Operation: An Empirical Study of Foreign Exchange Trading

This paper proposes a theory of firm boundaries based on foreknowledge development and exploitation in speculative or "informed" trading. Foreign exchange trading provides this study's empirical context. From research on information economics, we suggest optimal speculative trading operations are multiunit and globally dispersed. Alternatively, transaction cost economics suggests atomistic actors prevail in the market for fungible commodities like currencies. We also develop competing hypotheses about information technology's effects on foreign exchange trading operations. Speculation arguments predict that the global scope of trading operations will expand after the introduction of generic information technologies. Transaction cost economics proposes that, when atomistic actors do not prevail, trading operations will contract after this introduction. We test competing predictions with models of the expansion, contraction, and net change in a firm's global dispersion. We estimate these models with data from the population of banks worldwide engaged in interbank foreign exchange currency (FX) trading from 1974 to 1993. Our results uncover two types of firms: those that approach the atomistic actor of transaction cost economics, and those that resemble the globally dispersed multiunit configuration from our speculation discussion. These results encourage reflection on how the theory of the firm differs when firms trade to produce versus speculate.