Customer Order Flow and Exchange Rate Movements: Is There Really Information Content?

35 Pages Posted: 19 Apr 2005

See all articles by Ian W. Marsh

Ian W. Marsh

City University London - The Business School

Ceire O'Rourke

City University London - The Business School

Date Written: April 2005

Abstract

In this paper, we analyze the information content of the customer order flow seen by a leading European commercial bank's foreign exchange desk. We attempt to distinguish between three different explanations given in the literature for the positive contemporaneous correlation between exchange rate changes and net order flows. We discount the liquidity effect since otherwise equivalent order flows from different counterparties have different correlations with exchange rate changes. While it is harder to discount the feedback trading explanation, we find evidence that a measure of the degree of informedness of customers widely used in the equity microstructure literature closely corresponds to the size of the correlation between order flow and exchange rate changes. We argue that customer order flows do contain information.

Keywords: Foreign exchange, customer order flow, PIN

Suggested Citation

Marsh, Ian William and O'Rourke, Ceire, Customer Order Flow and Exchange Rate Movements: Is There Really Information Content? (April 2005). Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=704944 or http://dx.doi.org/10.2139/ssrn.704944

Ian William Marsh (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

Ceire O'Rourke

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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