Asymmetric Information, Price Discovery and Macroeconomic Announcements in FX Market: Do Top Trading Banks Know More?
Posted: 9 Jul 2008
Date Written: July 8, 2008
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: Suggested Citation