Microstructure Approach to Private Information in the Won/Dollar FX Market: The Influence of Domestic and Foreign Dealers' Order Flows (in Korean)

We examine whether order flows in the won/dollar interdealer FX market are related to private information and, if so, whose order flows are more informative. We classify dealers in the market into two types: Domestic and foreign. Then, we compare the effect of each type’s order flow on exchange rate movements on the intra-day and daily basis, and test the Granger causality among the order flows for each dealer type and the exchange rate movement. We use real-time transaction data and two-minute-interval quote data of interdealer trades (brokered through Seoul Money Brokerage Services Ltd.) from April 1 to May 30, 2003. We find the following results. First, the order flow explains statistically significant intra-day and daily exchange rate movements. Second, the effect of the foreign-dealer order flows on the exchange rate movement is more than two times greater than that of the domestic-dealer order flows. Third, the effect of foreign-dealer order flows is largest when the informational effect of trades and price discovery efficiency are highest during a day, i.e. the first 90 minutes after market opening. Finally, the foreign-dealer intra-day order flows Granger-cause the intra-day exchange rate movements but the reverse Granger causality does not exist. Our findings imply that private information in the market is mainly conveyed by foreign dealers' order flows which reflects information obtained from their customers, and that foreign dealers contribute more to intra-day price discovery than domestic dealers.