We investigate the informative property of quoting activity, measured by the frequency of price revisions, in the Euro/Dollar foreign exchange market. We use the multivariate double autoregressive conditional Poisson model, designed for time series of count data. We find that dealers’ quoting activity reacts to both news announcements and quoting activity of other dealers. Some dealers monitor quoting activity of others to infer useful information like private information and different reactions to public news announcements. Some dealers increase their activity, whilst others decrease it in response to the same news. We attribute this to the heterogeneous interpretation of the news content by individual traders and to the significant influence of some dealers on others.
The foreign exchange market uses electronic screens, such as Reuters, Telerate and Tenfore, to transmit indicative information about the prices at which the main participants, that is the large international banks, are prepared to buy or to sell currencies. Whenever a bank revises a spot quote of a currency, the latest quote is flashed instantaneously up on the main screen. However, electronic screens do not represent the whole information for the foreign exchange business. Some dealers choose to conduct their transactions through brokers or directly via telephone. Others may prefer not to exhibit quotes on any screen despite being active in the foreign exchange market (Goodhart and Demos, 1991).
This does not prevent electronic screens from being the only information that each dealer has on the other dealers’ quotes. On the other hand, dealers revise their quotes in order to reflect their reaction to public news announcements (Andersen, Bollerslev, Diebold, and Vega, 2002) or their detention of private information coming from their customers’ order flow (Lyons, 1995, Evans and Lyons, 2002, Cao, Evans, and Lyons, 2003). In addition, DeGennaro and Shrieves (1997) and Bauwens, Ben Omrane, and Giot (2003) show that quoting activity (assimilated to the activity of price revision) increases return volatility. In this paper, we seek empirically answers to questions related to the usefulness of quoting activity as an informative signal. Could quoting activity react to public news announcements ?
Could dealers rely on it to infer private information held by other dealers or deduce their different reactions to public news announcements ? If it is true, this signal may become useful for risk averse dealers, particularly in announcement periods, to observe the reactions of some other dealers before they intervene on the market. Thus far there has been, to the best of our knowledge, no work on the response of individual banks’ quoting activity to news. By looking at a sample of major dealers on the Euro/Dollar exchange rate, and by using a multivariate double autoregressive conditional Poisson model, we offer prima facie evidence of the fact that bank dealers’ quoting activity reacts signifi- cantly to some events but differently to the same news announcements.
In particular, for certain types of announcements, some banks increase their quoting activity, whilst others decrease it or keep it unchanged. This can lead to an ambiguous effect at the aggregate level implying that aggregate studies tend to under- or overestimate the importance of public news announcements for quoting activity. In addition, using quoting activity as a proxy for market activity like in DeGennaro and Shrieves (1997), Melvin and Yin (2000) and Bauwens, Ben Omrane, and Giot (2003), allows us to classify news announcements according to Evans’ taxonomy (Evans, 2002). We find that scheduled news are non-common knowledge (NCK) news whereas unscheduled news seem to belong to the category of common knowledge (CK) news.
Moreover, we find that some banks dealer quoting activity is affected by the quoting activity of some others. This means that dealers observe the frequency of price revision of other dealers in order to infer some useful information. This supports the view that dealers try to infer private information or different reactions of other dealers to some news announcements. The paper is structured as follows. In Section 2, we present the literature about news announcement and inter-dealer effects on quoting activity, in Section 3 the data, in Section 4 the models and results, and in the last section we conclude.
By Dr W. B. Omrane and A. Heinen
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