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Trader see, trader do: How do (small) FX traders react to large counterparties' trades?

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  • Menkhoff, Lukas
  • Schmeling, Maik

Abstract

We show that information about the counterparty of a trade affects the future trading decisions of individual traders. The effect is such that traders tend to reverse their order flow in line with the better-informed counterparties. Informed traders primarily incorporate their own private as well as publicly available information into prices, whereas uninformed traders mainly magnify the effect of the informed. This pattern of interaction among traders extends to different order types: traders treat their own and others' market orders as more informative than limit orders.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 7 (November)
Pages: 1283-1302

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:7:p:1283-1302

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Foreign exchange microstructure Order flow Informed traders Counterparty identity;

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References

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Cited by:
  1. King, Michael R. & Osler, Carol L. & Rime, Dagfinn, 2013. "The market microstructure approach to foreign exchange: Looking back and looking forward," Journal of International Money and Finance, Elsevier, vol. 38(C), pages 95-119.
  2. Moore, Michael J. & Payne, Richard, 2011. "On the sources of private information in FX markets," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1250-1262, May.

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