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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - The information content of retail investors' order flow
AU - Nolte, Ingmar
AU - Nolte, Sandra
PY - 2016
Y1 - 2016
N2 - In this paper, we provide evidence that the trading activity of small retail investors carries significant genuine information that can be exploited for the short-term out-of-sample forecasting of foreign exchange rates. Our findings are based on a unique dataset of around 2000 retail investors from the OANDA FXTrade electronic trading platform. Our results are consistent with the view that in the foreign exchange market private information is highly dispersed, but can be extracted by observing customer order flow. Previous studies, however, focused on the information content of costumer order flow of dealers in the interbank market, whose clients are themselves large institutional and professional investors. Our study is the first that analyzes a crowd of small retail investors and shows that even the trading activity of these investors contains, on aggregate, important non-public information that can be exploited for short-term exchange rate forecasting. Our findings lead us to conjecture that retail investors (on aggregate) are not pure noise traders but process dispersed information at least partially in a similar way as large institutional investors and hence place their orders accordingly.
AB - In this paper, we provide evidence that the trading activity of small retail investors carries significant genuine information that can be exploited for the short-term out-of-sample forecasting of foreign exchange rates. Our findings are based on a unique dataset of around 2000 retail investors from the OANDA FXTrade electronic trading platform. Our results are consistent with the view that in the foreign exchange market private information is highly dispersed, but can be extracted by observing customer order flow. Previous studies, however, focused on the information content of costumer order flow of dealers in the interbank market, whose clients are themselves large institutional and professional investors. Our study is the first that analyzes a crowd of small retail investors and shows that even the trading activity of these investors contains, on aggregate, important non-public information that can be exploited for short-term exchange rate forecasting. Our findings lead us to conjecture that retail investors (on aggregate) are not pure noise traders but process dispersed information at least partially in a similar way as large institutional investors and hence place their orders accordingly.
KW - retail investors
KW - trading activity dataset
KW - information processing
KW - order flow
KW - foreign exchange market,
U2 - 10.1080/1351847X.2014.963633
DO - 10.1080/1351847X.2014.963633
M3 - Journal article
VL - 22
SP - 80
EP - 104
JO - European Journal of Finance
JF - European Journal of Finance
SN - 1351-847X
IS - 2
ER -