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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

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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File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-415.pdf
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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) 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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Keywords: Foreign exchange microstructure; order flow; informed traders; counterparty identity;

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References

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Cited by:
  1. Michael R. King & Carol Osler & Dagfinn Rime, 2013. "The market microstructure approach to foreign exchange - Looking back and looking forward," Working Paper 2013/12, Norges Bank.

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