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Conference of 2007
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This paper shows how traders learn from each other in a currency limit order market. We find that traders react on the revelation of counterparty identity after the trade by reversing their order flow in line with the better informed. This result holds when controlling for proxies of other private and public information. Moreover, we find that informed traders process infor-mation differently from uninformed. Informed focus more on public information, whereas uninformed amplify price discovery by learning from the informed.
Abstract
Learning from counterparties' order flow in electronic trading
Menkhoff, Lukas; Schmeling, MaikThis paper shows how traders learn from each other in a currency limit order market. We find that traders react on the revelation of counterparty identity after the trade by reversing their order flow in line with the better informed. This result holds when controlling for proxies of other private and public information. Moreover, we find that informed traders process infor-mation differently from uninformed. Informed focus more on public information, whereas uninformed amplify price discovery by learning from the informed.