I found this paper on the internet, free to download: http://ideas.repec.org/p/nbr/nberwo/11748.html
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 one 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 macroeconomy.
This paper is math heavy and as far as I understand gives an individual trader no edge whatsoever as an individual has no access to order flow information in interbank forex market. What this paper proves is that banks use order flow information from other parties to their advantage and as the paper says "order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates" which to me means that they use this info to speculate. It also means that a lot more volume is speculative in nature than is traditionally thought.
If anybody is interested in reading this paper and share their thoughts on it, please do. I might have missed some points as I am not very math oriented and english is not my first language.
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 one 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 macroeconomy.
This paper is math heavy and as far as I understand gives an individual trader no edge whatsoever as an individual has no access to order flow information in interbank forex market. What this paper proves is that banks use order flow information from other parties to their advantage and as the paper says "order flow from segments traditionally thought to be liquidity-motivated actually has power to forecast exchange rates" which to me means that they use this info to speculate. It also means that a lot more volume is speculative in nature than is traditionally thought.
If anybody is interested in reading this paper and share their thoughts on it, please do. I might have missed some points as I am not very math oriented and english is not my first language.
