Sources of Private Information in FX Trading

This paper examines the information content of trades by different participants via different trading channels in the spot foreign exchange market. Using spot FX transactions of a major Australian bank, we find that central banks have the greatest price impact, followed by nonbank financial institutions such as hedge funds and mutual funds. Trades by non-financial corporations have the least impact on dealer pricing. In the interbank market, dealers with greater private information appear to choose direct trading which has lower post-trade transparency, while indirect trading via brokers has little price impact. Furthermore, the price impact from each group largely comes from dealers or customers in the top quartile of trading volume. Overall the study presents an information hierarchy across different types of players and the choices of trading mechanisms in the FX market.