The Information Content of Retail Investors' Order Flow

35 Pages Posted: 18 Jul 2012 Last revised: 18 Nov 2013

See all articles by Ingmar Nolte

Ingmar Nolte

Lancaster University - Department of Accounting and Finance

Sandra Nolte (Lechner)

Lancaster University Management School

Date Written: November 14, 2013

Abstract

In this paper we provide evidence that the trading activity of small retail investors carries significant genuine information for the short term out-of-sample forecasting of foreign exchange rates. Our findings are based on a unique dataset of around 2000 retail investors from the OANDA FXTrade electronic trading platform.

Our results are consistent with the view that in the foreign exchange market private information is highly dispersed, but can be extracted by observing customer order flow. Previous studies, however, focused on the information content of costumer order flow of dealers in the interbank market, whose clients are themselves large institutional and professional investors. Our study is the first that analyses a crowd of small retail investors and shows that even the trading activity of these investors contains, on aggregate, important non-public information, that can be exploited for short term exchange rate forecasting. Our findings lead us to conjecture that retail investors (on aggregate) are not pure noise traders but process dispersed information at least partially in a similar way as large institutional investors and hence place their orders accordingly.

Keywords: Retail Investors, Trading Activity Dataset, Information Processing, Order Flow, Foreign Exchange Market

JEL Classification: G10, F31, C32

Suggested Citation

Nolte, Ingmar and Nolte (Lechner), Sandra, The Information Content of Retail Investors' Order Flow (November 14, 2013). Available at SSRN: https://ssrn.com/abstract=2111118 or http://dx.doi.org/10.2139/ssrn.2111118

Ingmar Nolte (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Sandra Nolte (Lechner)

Lancaster University Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

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