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Profits and Position Control: A Week of FX Dealing

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Author Info
Richard K. Lyons.

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Abstract

This paper examines foreign exchange trading at the dealer level. The dealer we track averages $100,000 in profits per day on volume of $1 billion per day (or one basis point). The half-life of the dealer's position is only ten minutes, providing strong support for inventory models. A methodological innovation allows us to identify his speculative position over time. This speculative position determines the share of profits deriving from speculation versus intermediation: intermediation is much more important.

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Paper provided by University of California at Berkeley in its series Research Program in Finance Working Papers with number RPF-273.

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Date of creation: 01 Oct 1997
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Handle: RePEc:ucb:calbrf:rpf-273

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  1. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley. [Downloadable!]
    Other versions:
  2. Ulibarri, Carlos A. & Anselmo, Peter & Hovsepian, Karen & Florescu, Ionut & Tolk, Jacob, 2008. "'Noise trader risk' and Bayesian market making in FX derivatives: rolling loaded dice?," MPRA Paper 14814, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Yin-Wong Cheung & Menzie D. Chinn, 1999. "Macroeconomic Implications of the Beliefs and Behavior of Foreign Exchange Traders," NBER Working Papers 7417, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Charles M. Kahn & William Roberds, 2000. "The CLS Bank: a solution to the risks of international payments settlement?," Working Paper 2000-15, Federal Reserve Bank of Atlanta. [Downloadable!]
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  5. Yin-Wong Cheung & Menzie D. Chinn, 1999. "Traders, Market Microstructure and Exchange Rate Dynamics," NBER Working Papers 7416, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Adrian E. Tschoegl, . "The Key to Risk Management: Management," Center for Financial Institutions Working Papers 99-42, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  7. Mario Cerrato & Nicholas Sarantis & Alex Saunders, 2009. "An investigation of customer order flow in the foreign exchange market," Working Papers 2009_25, Department of Economics, University of Glasgow. [Downloadable!]
  8. Christopher J. Neely & Paul A. Weller, 2001. "Intraday technical trading in the foreign exchange market," Working Papers 1999-016, Federal Reserve Bank of St. Louis. [Downloadable!]
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  9. Cheung, Yin-Wong & Chinn, Menzie D., 2000. "Currency Traders and Exchange Rate Dynamics: A Survey of the U.S. Market," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  10. Gehrig, Thomas & Menkhoff, Lukas, 2003. "The use of flow analysis in foreign exchange: exploratory evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-276, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  11. Richard Portes & Helene Rey, 1998. "The Emergence of the Euro as an International Currency," NBER Working Papers 6424, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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