Dealer behavior and trading systems in foreign exchange markets |
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| Institution: | 1. Johns Hopkins University Carey Business School, 100 International Drive, Baltimore, MD 21202, USA;2. MIT Sloan School of Management, 100 Main Street E62-623, Cambridge, MA 02142, USA;3. National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, USA;1. International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431, USA;2. Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, USA |
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| Abstract: | We study dealer behavior in the foreign exchange spot market using detailed observations on all the transactions of four interbank dealers. There is strong support for an information effect in incoming trades. The direction of trade is most important, but we also find that the information effect increases with trade size in direct bilateral trades. All four dealers control their inventory intensively. Inventory control is not, however, manifested through a dealer's own prices in contrast to findings by Lyons (J. Financial Econ. 39(1995) 321). Furthermore, we document differences in trading styles, especially how they actually control their inventories. |
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