Informed traders’ arrival in foreign exchange markets: Does geography matter?

Abstract

This article critically investigates the possibility that private information offering systematic profit opportunities exists in the spot foreign exchange market. Using a unique dataset with trader-specific limit and market order histories for more than 10,000 traders, we detect transaction behavior consistent with the informed trading hypothesis, where traders consistently make money. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker's beliefs. Both the estimates of the trade model parameters and our model-free analysis of the data suggest that the timevarying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular day-of-week, hour-of-day, or geographic location (market).

Information arrival and volatility: Evidence from the Saudi Stock Exchange (Tadawul)

“…There is a large body of literature on the relationship between trading volume and volatility of financial assets. While some studies have focused on foreign exchange market (see Richard Payne 2003;Aditya Kaul and Stephen Sapp 2009; Antonio Portugal Duarte, Joao Sousa Andrade, and Adelaide Duarte 2010; Michael J. Moore and Payne 2011; Ramazan Gencay and Nikola Gradojević 2013;Gencay et al 2015), the majority of the existing literature have examined the stock markets. Previous studies have documented a positive correlation between stock price volatility and trading volume, in accordance with MDH (Thomas Epps and Mary Lee Epps 1976;Goerge Tauchen and Mark Pitts 1983;Lawrence Harris 1986Jonathan M. Karpoff 1987).…”

Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach

“…Eaves and Williams (2010) assert that the timing of privately informed traders cannot be the source of intraday patterns in the Tokyo Grain Exchange. Seasonality (both intraday and day-of-the-week), despite being caused by different events, can be observed in the increasing volatility and liquidity in auctions and in the first hours of trading, thus allowing informed investors to use those periods of the day to operate their volumes as indicated by Gençay et al (2015).…”

Analysis of Individual High-Frequency Traders’ Buy–Sell Order Strategy Based on Multivariate Hawkes Process

“…As an indicator for predicting the short-term volatility of market prices from the order book information, the volume-synchronized probability of informed trading (VPIN) has been proposed and actively studied [ 16 , 17 , 18 , 19 , 20 ]. In addition, informed trading using the advantage of information such as public news and confidential information has been studied using high-frequency data [ 21 , 22 , 23 , 24 , 25 ]. We believe that it is crucial to gain a deep understanding of their trading behavior in current financial markets, where HFTs provide most of the liquidity.…”