On the sources of private information in FX markets |
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Authors: | Michael J Moore |
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Institution: | a Queen’s University Belfast, 25 University Square, Belfast BT7 1NN, UK b Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, UK |
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Abstract: | We investigate the source of information advantage in inter-dealer FX trading using data on trades and counter-party identities. In liquid dollar exchange rates, information is concentrated among dealers that trade most frequently and specialize their activity in a particular rate. In cross-rates, traders that engage in triangular arbitrage are best informed. Better-informed traders are also located on larger trading floors. In cross-rates, the ability to forecast flows explains all of the advantage of the triangular arbitrageurs. In liquid dollar rates, specialist traders can forecast both order-flow and the component of exchange rate changes that is uncorrelated with flow. |
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Keywords: | F31 G15 G20 |
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