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Moore and Payne Size, specialism and the nature of informational advantage in inter-dealer foreign exchange trading. Discussion by Ian Marsh Cass Business School. Selling points of paper. This paper tries to address the key issue in foreign exchange rate modelling

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Moore and PayneSize, specialism and the nature of informational advantage in inter-dealer foreign exchange trading

Discussion by

Ian Marsh

Cass Business School

selling points of paper
Selling points of paper
  • This paper tries to address the key issue in foreign exchange rate modelling
  • What makes foreign exchange rates move?”
but what is going on here
But what is going on here?

Why is there such a huge correlation between exchange rate changes and order flow?

  • Information in order flow
  • Risk premia
  • Feedback trading
  • Something else
moore and payne
Moore and Payne

Argue that if it is all about information then there should be differences in the way prices react to deals by traders likely to have asymmetric information

Show by means of regression of price impact on indicator dummies that price impacts differ in plausible ways

so what
So What?

That’s fine but so what?

It isn’t clear to me we learn a vast amount from this

Most importantly, we do not learn what the title suggests we will:

“Size, specialism and the nature of informational advantage in inter-dealer foreign exchange trading”

so what1
So What?

What we learn is that when a big or specialist trader supplies liquidity he suffers smaller costs than a smaller generalist trader

Similarly, when a big or specialist trader takes liquidity he creates a larger price impact than does a smaller generalist trader

price discovery
Price Discovery

How does the market learn from trading?

Deals are anonymous on this platform

Only the taker and maker know identities

Everyone else just sees an arrow on screen

There is no information revelation

So how does the rest of the market differentiate between a OMST deal (0.59 price impact) and a SMOT (0.14)?

trader skill
Trader Skill

Maybe price impacts reflect information differences and the market can perform miracles

But differential PIs might just reflect trader skill even if all traders are uninformed

A $:€ trader for a big bank won’t keep his job long if he gets caned every time he supplies liquidity and doesn’t make a gain when he initiates a trade

informational advantages
Informational Advantages

The paper is pretty silent on where these large specialist traders get their info from

It is mostly thought that they get the info from their customers

Customer might be a smart hedge fund that knows the true value of FX

Or might be a dumb corporate who reveals that UK is doing well by selling £ to repatriate earnings

Or something vague like liquidity preference shifts

informational advantages1
Informational Advantages

This paper tells us nothing about the nature of the information that leads big specialist traders to trade well

To get that, the authors would need to look at customer order flows, not the interdealer flows they use here

informational advantages2
Informational Advantages

The analysis is at such a high frequency that I worry the customer-dealer info link is weakened

The depvar is price change from -5 to +10 trades in main results, 1 minute in $/€

Is this really the appropriate horizon over which to measure information effects?

cheap shot
Cheap Shot

Finally, having taught financial statistics for a term, a cheap shot

We criticise macro FX modellers for not being able to explain much using macro fundamentals

But the R2s in this paper are around 1%

And price impact coefficients are fractions of a basis point