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
• What makes foreign exchange rates move?”
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measured fundamentals
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The dire performance of macro
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unmeasured fundamentals
expectational errors
The stunning performance of micro
But what is going on here?
Why is there such a huge correlation
between exchange rate changes and
order flow?
1. Information in order flow
2. Risk premia
3. Feedback trading
4. Something else
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?
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 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
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
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
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 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 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
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