Understanding Order Flow

36 Pages Posted: 1 Feb 2006 Last revised: 8 Aug 2022

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: November 2005

Abstract

This paper develops a model for understanding end-user order flow in the FX market. The model addresses several puzzling findings. First, the estimated price-impact of flow from different end-user segments is, dollar-for-dollar, quite different. Second, order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates. Third, about one third of order flow's power to forecast exchange rates one month ahead comes from flow's ability to forecast future flow, whereas the remaining two-thirds applies to price components unrelated to future flow. We show that all of these features arise naturally from end-user heterogeneity, in a setting where order flow provides timely information to market-makers about the state of the macroeconomy.

Suggested Citation

Evans, Martin D.D. and Lyons, Richard K., Understanding Order Flow (November 2005). NBER Working Paper No. w11748, Available at SSRN: https://ssrn.com/abstract=842482

Martin D.D. Evans (Contact Author)

Georgetown University - Department of Economics ( email )

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Richard K. Lyons

University of California, Berkeley ( email )

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