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The information content of retail investors' order flow

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The information content of retail investors' order flow. / Nolte, Ingmar; Nolte, Sandra.

In: European Journal of Finance, Vol. 22, No. 2, 2016, p. 80-104.

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Nolte, Ingmar ; Nolte, Sandra. / The information content of retail investors' order flow. In: European Journal of Finance. 2016 ; Vol. 22, No. 2. pp. 80-104.

Bibtex

@article{fd0b9e2bb971472ba2c850079bd1b9c2,
title = "The information content of retail investors' order flow",
abstract = "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.",
keywords = "retail investors, trading activity dataset , information processing , order flow , foreign exchange market,",
author = "Ingmar Nolte and Sandra Nolte",
year = "2016",
doi = "10.1080/1351847X.2014.963633",
language = "English",
volume = "22",
pages = "80--104",
journal = "European Journal of Finance",
issn = "1351-847X",
publisher = "Routledge",
number = "2",

}

RIS

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 -