IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v49y2015i4p1431-1462.html
   My bibliography  Save this article

Informed traders’ arrival in foreign exchange markets: Does geography matter?

Author

Listed:
  • Ramazan Gençay

    ()

  • Nikola Gradojevic

    ()

  • Richard Olsen

    ()

  • Faruk Selçuk

Abstract

This article critically investigates the possibility that private information offering systematic profit opportunities exists in the spot foreign exchange market. Using a unique dataset with trader-specific limit and market order histories for more than 10,000 traders, we detect transaction behavior consistent with the informed trading hypothesis, where traders consistently make money. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker’s beliefs. Both the estimates of the trade model parameters and our model-free analysis of the data suggest that the time-varying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular day-of-week, hour-of-day, or geographic location (market). Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Ramazan Gençay & Nikola Gradojevic & Richard Olsen & Faruk Selçuk, 2015. "Informed traders’ arrival in foreign exchange markets: Does geography matter?," Empirical Economics, Springer, vol. 49(4), pages 1431-1462, December.
  • Handle: RePEc:spr:empeco:v:49:y:2015:i:4:p:1431-1462
    DOI: 10.1007/s00181-015-0917-z
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00181-015-0917-z
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    2. Bjonnes, Geir Hoidal & Rime, Dagfinn, 2005. "Dealer behavior and trading systems in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 75(3), pages 571-605, March.
    3. repec:wsi:wschap:9789813148543_0011 is not listed on IDEAS
    4. Rui Albuquerque & Eva De Francisco & Luis B. Marques, 2008. "Marketwide Private Information in Stocks: Forecasting Currency Returns," Journal of Finance, American Finance Association, vol. 63(5), pages 2297-2343, October.
    5. Madhavan, Ananth & Smidt, Seymour, 1993. " An Analysis of Changes in Specialist Inventories and Quotations," Journal of Finance, American Finance Association, vol. 48(5), pages 1595-1628, December.
    6. Boehmer, Ekkehart & Grammig, Joachim & Theissen, Erik, 2007. "Estimating the probability of informed trading--does trade misclassification matter?," Journal of Financial Markets, Elsevier, vol. 10(1), pages 26-47, February.
    7. Menkhoff, Lukas & Schmeling, Maik, 2008. "Local information in foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1383-1406, December.
    8. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
    9. Martin D. D. Evans & Richard K. Lyons, 2017. "Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 11, pages 457-475 World Scientific Publishing Co. Pte. Ltd..
    10. Paolo Vitale, 2012. "Optimal informed trading in the foreign exchange market," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 989-1013, November.
    11. Ingmar Nolte & Sandra Nolte, 2012. "How do individual investors trade?," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 921-947, November.
    12. Kaul, Aditya & Sapp, Stephen, 2009. "Trading activity, dealer concentration and foreign exchange market quality," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2122-2131, November.
    13. Lei, Qin & Wu, Guojun, 2005. "Time-varying informed and uninformed trading activities," Journal of Financial Markets, Elsevier, vol. 8(2), pages 153-181, May.
    14. Gradojevic, Nikola, 2007. "The microstructure of the Canada/U.S. dollar exchange rate: A robustness test," Economics Letters, Elsevier, vol. 94(3), pages 426-432, March.
    15. Odders-White, Elizabeth R. & Ready, Mark J., 2008. "The probability and magnitude of information events," Journal of Financial Economics, Elsevier, vol. 87(1), pages 227-248, January.
    16. Foster, F. Douglas & Viswanathan, S., 1994. "Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 499-518, December.
    17. David Easley & Robert F. Engle & Maureen O'Hara & Liuren Wu, 2008. "Time-Varying Arrival Rates of Informed and Uninformed Trades," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(2), pages 171-207, Spring.
    18. Menkhoff, Lukas & Schmeling, Maik, 2010. "Whose trades convey information? Evidence from a cross-section of traders," Journal of Financial Markets, Elsevier, vol. 13(1), pages 101-128, February.
    19. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
    20. Harald Hau, 2001. "Location Matters: An Examination of Trading Profits," Journal of Finance, American Finance Association, vol. 56(5), pages 1959-1983, October.
    21. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    22. Ranaldo, Angelo, 2009. "Segmentation and time-of-day patterns in foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2199-2206, December.
    23. Covrig, Vicentiu & Melvin, Michael, 2002. "Asymmetric information and price discovery in the FX market: does Tokyo know more about the yen?," Journal of Empirical Finance, Elsevier, vol. 9(3), pages 271-285, August.
    24. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1996. " Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow," Journal of Finance, American Finance Association, vol. 51(3), pages 811-833, July.
    25. Gençay, Ramazan & Gradojevic, Nikola, 2013. "Private information and its origins in an electronic foreign exchange market," Economic Modelling, Elsevier, vol. 33(C), pages 86-93.
    26. Heimer, Rawley & Simon, David, 2015. "Facebook Finance: How Social Interaction Propagates Active Investing," Working Paper 1522, Federal Reserve Bank of Cleveland.
    27. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1589-1614, September.
    28. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    29. Gençay, Ramazan & Dacorogna, Michel & Muller, Ulrich A. & Pictet, Olivier & Olsen, Richard, 2001. "An Introduction to High-Frequency Finance," Elsevier Monographs, Elsevier, edition 1, number 9780122796715.
    30. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
    31. 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.
    32. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    33. Geir H. Bjønnes & Carol L. Osler & Dagfinn Rime, 2009. "Asymmetric information in the interbank foreign exchange market," Working Paper 2008/25, Norges Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gradojevic, Nikola & Erdemlioglu, Deniz & Gençay, Ramazan, 2017. "Informativeness of trade size in foreign exchange markets," Economics Letters, Elsevier, vol. 150(C), pages 27-33.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:49:y:2015:i:4:p:1431-1462. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.