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

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Author Info
Menkhoff, Lukas
Schmeling, Maik

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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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Publisher Info
Paper provided by Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover with number dp-415.

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Length: 44 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:han:dpaper:dp-415

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Related research
Keywords: Foreign exchange microstructure; order flow; informed traders; counterparty identity;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F31 - International Economics - - International Finance - - - Foreign Exchange

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    Other versions:
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