Dealer Behavior and Trading Systems in Foreign Exchange Markets
43 Pages Posted: 27 Nov 2000
Date Written: August 2000
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 with findings by Lyons [J. Fin. Econ 39(1995) 321]. Furthermore, we document differences in trading styles, especially how they actually control their inventories.
Keywords: Foreign exchange, microstructure, trading
JEL Classification: F31, G15
Suggested Citation: Suggested Citation
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