Order Flow and Exchange Rate Dynamics in Electronic Brokerage System Data

35 Pages Posted: 25 Apr 2005  

David W. Berger

U.S. Board of Governors of the Federal Reserve System - Division of International Finance

Alain Chaboud

Federal Reserve Board - Division of International Finance

Sergey Chernenko

Ohio State University (OSU) - Department of Finance

Edward Howorka

EBS Group Limited

Raj S.K. Iyer

EBS Group Limited

David Liu

EBS

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: September 2006

Abstract

We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high-frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices.

Keywords: order flow, foreign exchange, high-frequency data, news announcements

JEL Classification: F31, G14

Suggested Citation

Berger, David W. and Chaboud, Alain and Chernenko, Sergey and Howorka, Edward and Iyer, Raj S.K. and Liu, David and Wright, Jonathan H., Order Flow and Exchange Rate Dynamics in Electronic Brokerage System Data (September 2006). FRB International Finance Discussion Paper No. 830. Available at SSRN: https://ssrn.com/abstract=709181 or http://dx.doi.org/10.2139/ssrn.709181

David W. Berger

U.S. Board of Governors of the Federal Reserve System - Division of International Finance

20th St. and Constitution Ave.
Washington, DC 20551
United States

Alain Chaboud (Contact Author)

Federal Reserve Board - Division of International Finance ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
(202) 452 3756 (Phone)

Sergey Chernenko

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
(614) 292-4412 (Phone)

HOME PAGE: http://www.fisher.osu.edu/~chernenko_1

Edward Howorka

EBS Group Limited ( email )

10 Paternoster Square
London EC4M 7DY
United Kingdom

Raj S.K. Iyer

EBS Group Limited ( email )

10 Paternoster Square
London EC4M 7DY
United Kingdom

David Liu

EBS ( email )

10 Paternoster Square
London EC4M 7DY
United Kingdom

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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