Asymmetric Information, Price Discovery and Macroeconomic Announcements in FX Market: Do Top Trading Banks Know More?

Posted: 9 Jul 2008

See all articles by Long Chen

Long Chen

City University London - Sir John Cass Business School

Kate Phylaktis

City University London - Sir John Cass Business School

Date Written: July 8, 2008

Abstract

This study investigates information asymmetry in the foreign exchange market by testing the hypothesis that top trading banks possess superior information on the macro-economy because they process greater order flow, which, according to the micro-structure literature, helps them aggregate the dispersed information and feel the general movements of the economy. Examining the information share of the banks in the Reuters EFX system using indicative GBP-$US data over 5 years, we find that the top 10 banks, out of 100 quoting banks in the market, have a monthly average share of over 70% of total market information, and around 80% during some U.S. macro announcements. These results suggest the possibility of private information over public news in the foreign exchange market.

Keywords: Market Microstructure, Foreign Exchange Markets, Macroeconomic News Announcements, Price Discovery, Information Shares

JEL Classification: D82, F31, G15

Suggested Citation

Chen, Long and Phylaktis, Kate, Asymmetric Information, Price Discovery and Macroeconomic Announcements in FX Market: Do Top Trading Banks Know More? (July 8, 2008). Available at SSRN: https://ssrn.com/abstract=1157058

Long Chen

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Kate Phylaktis (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

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