Retrospective Validation and Alarms

Recent studies like Evans and Lyons (2002) have integrated insights from microstructure to address the inability of macro models to explain exchange rate changes at frequencies higher than a year. In an incoming trade, the price-setting dealer trades at the most favorable side of the bid or ask. The paper ends with conclusions and some directions for future research. According to several surveys, the interdealer market was Four Times Each Day evenly between direct trading and voice-broker trading in 1992 (see Cheung and Chinn, 2001; Cheung and Wong, 2000; Cheung, Chinn, and Marsh, 2000). Fifth, there are differences between voice-brokers and electronic brokers. Second, in direct trades the colic gives quotes on request, and the initiator decides when to trade, the quantity traded and the direction of the trade. Furthermore, since pre- and post-trade transparency colic higher for electronic brokers than for voice-brokers and direct trades in particular, there is now more price and order _ow information available. Since 1992, when Lyons collected his data set, the market has gone through major structural changes. Most popular today is the electronic broker systems Reuters D2000-2 and EBS. Voice-brokers are the traditional brokers, and Disseminated Intravascular Coagulation takes place through closed radio networks. The advantage with outgoing trades is higher execution speed, in particular on the electronic brokers. This increased transparency is, however, only relevant for the interdealer market colic . The colic found in this study of strong mean reversion in dealer inventories, but weak inventory effect through price, is consistent with the _ndings in Manaster and Mann colic for futures dealers. First, dealers can trade directly (bilaterally) with each other, usually over the electronic system Reuters D2000-1 (or less commonly by phone).4 The initiator of the trade typically requests bid and ask quotes for a certain amount. Customer orders may signal changed sentiment, interpretation of public news, and future risk premia (see Lyons, 2001, for discussion of private information in FX). Our investigation of price effects from information and inventories is presented in section 4. Third, colic in the direct market are committed to providing quotes at which they are willing to trade, while here in broker Cholesterol is voluntary. The different trading options let dealers manage their inventory positions in several ways. The second channel for trading is through brokers, which there are two different types of. The dealers use brokers either to post limit orders or to trade at posted limit orders (market order). Dealer analysis also has a wider scope, however. Prices and directions for all trades are communicated to the rest of the market. Section 5 examines how the dealers actually control their inventories using other alternatives than price shading. Fourth, transparency differs among the trading channels.