News and Intraday Retail Investor Order Flow in Foreign Exchange Markets

Abstract

This paper examines the trading behavior of individual investors using a proprietary intraday dataset of a large pool of retail investor aggregate (minute by minute) long and short positions in EUR/USD. Standard event study analysis shows no significant adjustment in trading ahead of scheduled macro news announcements and trading contrary to the announcement surprise after the event. A panel regression analysis shows that such contrarian trading behavior is mostly driven by lagged returns rather than fundamental macro news. Further intraday time series analysis shows that the lagged overall news sentiment also significantly affects retail investor trading. Finally, to verify the uninformed nature of retail trading, we show that simple cross-over trading strategies that exploit retail investors’ order flow could be profitable. Overall, our results suggest that retail investors in currency markets are influenced by news sentiment and past returns, but do not possess the skills to extract fundamental information from public news. Our findings support the differential abilities of market participants to interpret public information as an explanation for the importance of order flow in price formation in currency markets.

Keywords: Foreign Exchange, Behavioral Finance, Retail Investors, Order Flow, TRMI, News

JEL Classification: F31, G12, G14