Understanding order flow

Martin Evans and Richard Lyons ()

International Journal of Finance & Economics, 2006, vol. 11, issue 1, 3-23

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 1 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 macro-economy. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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Working Paper: Understanding Order Flow (2005)
Working Paper: Understanding Order Flow (2005)
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DOI: 10.1002/ijfe.287

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