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Traders, Market Microstructure and Exchange Rate Dynamics

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  • Yin-Wong Cheung
  • Menzie D. Chinn

Abstract

We report findings from a survey of United States foreign exchange traders. Our results indicate that: (i) The share of customer business, versus interbank business, has remained fairly constant; (ii) The channels by which transactions take place have changed, as electronically-brokered transactions have risen from 2% to 46% of total, mostly at the expense of transactions undertaken by traditional brokers; (iii) The single most widely- cited reason for deviating from the standard market convention on the bid-ask spread is a thin/hectic market; (iv) Half or more of market respondents believe that large players dominate in the dollar-pound and dollar-Swiss franc markets; and (v) 60% of respondents believe there is low predictability of exchange rates intraday. Even at medium and long run horizons, only a third of traders believe that there is high predictability.

Suggested Citation

  • Yin-Wong Cheung & Menzie D. Chinn, 1999. "Traders, Market Microstructure and Exchange Rate Dynamics," NBER Working Papers 7416, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7416
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    References listed on IDEAS

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    1. Bessembinder, Hendrik, 1994. "Bid-ask spreads in the interbank foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 35(3), pages 317-348, June.
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    5. Robert P. Flood & Mark P. Taylor, 1996. "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," NBER Chapters,in: The Microstructure of Foreign Exchange Markets, pages 261-302 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Tiffany Hutcheson, 2000. "Trading in the Australian Foreign Exchange Market," Working Paper Series 107, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Chris D'Souza, 2002. "A Market Microstructure Analysis of Foreign Exchange Intervention in Canada," Staff Working Papers 02-16, Bank of Canada.
    3. Gabriele Galati, 2000. "Trading volumes, volatility and spreads in foreign exchange markets: evidence from emerging market countries," BIS Working Papers 93, Bank for International Settlements.
    4. Gabriele Galati, 2001. "Trading volumes, volatility and spreads in FX markets: evidence from emerging market countries," BIS Papers chapters,in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 197-229 Bank for International Settlements.
    5. Poskitt, Russell, 2005. "Bid/ask spreads in the foreign exchange market: An alternative interpretation," Pacific-Basin Finance Journal, Elsevier, vol. 13(5), pages 562-583, November.
    6. Bjonnes,H. & Rime,D., 2000. "Customer trading and information in foreign exchange markets," Memorandum 30/2000, Oslo University, Department of Economics.
    7. Martin D. D. Evans, 2017. "FX Trading and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 5, pages 189-245 World Scientific Publishing Co. Pte. Ltd..
    8. Carol L. Osler, 2000. "Support for resistance: technical analysis and intraday exchange rates," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-68.
    9. Bjonnes,H. & Rime,D., 2000. "FX trading ... LIVE! : dealer behavior and trading systems in foreign exchange markets," Memorandum 29/2000, Oslo University, Department of Economics.
    10. M. Frenkel & C. Pierdzionc & G. Stadtmann, 2001. "The foreign exchange market interventions of the European Central Bank," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(218), pages 249-287.
    11. Arnswald, Torsten, 2001. "Investment Behaviour of German Equity Fund Managers - An Exploratory Analysis of Survey Data," Discussion Paper Series 1: Economic Studies 2001,08, Deutsche Bundesbank.
    12. Christiane Nickel & G√ľnter Schmidt & Georg Stadtmann & Michael Frenkel, 2001. "The Effects of Capital Controls on Exchange Rate Volatility and Output," IMF Working Papers 01/187, International Monetary Fund.
    13. Hogan, Warren P. & Batten, Jonathan A., 2005. "Informed and uninformed trading on the Australian dollar," International Review of Financial Analysis, Elsevier, vol. 14(1), pages 61-75.
    14. M. Frenkel & C. Pierdzionc & G. Stadtmann, 2001. "The foreign exchange market interventions of the European Central Bank," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 54(218), pages 249-287.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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