Customer Trading in the Foreign Exchange Market: Empirical Evidence from an Internet Trading Platform

Abstract

This paper analyzes the inter-temporal relationship between currency price changes and their expectations on intra-day frequencies. We examine how price expectations are transmitted into prices by means of order flow and how order flow is affected by past prices (feedback effects). Based on a trading activity dataset from a foreign exchange electronic trading platform, OANDA FXTrade, currency price change expectations are approximated by aggregating very detailed individual order information aiming to present an accurate picture of currency price expectations. We investigate on different intra-day sampling frequencies, whether price expectations and trading patterns of the OANDA FXTrade investors are helpful for predicting future currency prices. Moreover, considering the literature on market microstructure and behaviorial finance, we formulate several hypotheses about the relationship between price changes and order flow as well as the trading behavior and the preference structure of our investors, which we investigate with the help of forecasting studies and out-of-sample prediction criteria.

Keywords: Customer Dataset, Order Flow, Price Changes, Foreign Exchange Market

JEL Classification: G10, F31,C32