Trader See, Trader Do: How Do (Small) FX Traders React to Large Counterparties’ Trades?

52 Pages Posted: 30 Mar 2009 Last revised: 25 Mar 2010

See all articles by Lukas Menkhoff

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: March 24, 2010

Abstract

We show that information about the counterparty of a trade affects the future trading decisions of individual traders. The effect is such that traders tend to reverse their order flow in line with the better-informed counterparties. Informed traders primarily incorporate their own private as well as publicly available information into prices, whereas uninformed traders mainly magnify the effect of the informed. This pattern of interaction among traders extends to different order types: traders treat their own and others’ market orders as more informative than limit orders.

Keywords: Foreign exchange microstructure, order flow, informed traders, counterparty identity

JEL Classification: F31, G12, G15, D82

Suggested Citation

Menkhoff, Lukas and Schmeling, Maik, Trader See, Trader Do: How Do (Small) FX Traders React to Large Counterparties’ Trades? (March 24, 2010). Available at SSRN: https://ssrn.com/abstract=1370244 or http://dx.doi.org/10.2139/ssrn.1370244

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Maik Schmeling (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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