Volume or Order Flow? : Which contains more information in really traded Yen/Dollar Foreign Exchange Market?

Masayuki Susai (Nagasaki University)

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Data

Real traded data is difficult to use in FX market. But in this paper, we use real traded data, we call this type of data as transaction-based data here , from ICAP. The data set is named Data Mine ver.1.5 from EBS system. This data set provides us the foreign exchange rate traded, bid or ask indicator and volume indicator in 1 second interval. As we know, so many dealers in banks and financial institutions in the world are trading through this EBS system.

Data Mine ver.1 does not contain volume of each trade. In Data Mine ver.1.5, the indicator of trading volume in each trade is provided. Each indicator covers given range of trade volume. For example, indicator A covers 0 to 10thoudand US dollars (USD) against Japanese Yen (JPY). We choose the middle number of this range and assign 5000 to indicator A.

In this paper, we construct 5 minutes and 10 minutes interval data from 1 second interval data. Data Mine ver.1.5 is nearly tick by tick data. But within the second, there might be more than one trade. Or there might be more than 10 minutes between the trades. In latter case, this series are not even spaced data and we may have difficulties to estimate econometric models. For these reasons, we construct two even spaced data sets. In these data sets, there exist weekends, national holidays or seasonality of the time of the day. We exclude possible anomalies arising from these non trading days and non trading time by the methods we describe below.

Our data covers Jan. 1 to Dec. 31, 2007 . In our research, we use JPY/USD rate, transaction volume, and bid or ask indicator. Because the data we use is transaction data, we cannot use bid-ask spread. But here we can use bid or ask indicator. From these indicators, we affirm the direction of the transaction. For example, if the bid indicator is assigned to a JPY/USD rate, this means bid side of the foreign exchange rate is hit by the counter part of the transaction. This transaction may have downward pressure to the JPY/USD rate. For these reasons, we use these bid or ask indicators as the price pressure indicator. We construct two kinds of price pressure indicator in this paper. First, we count the bid and ask transaction in each 5 and 10 minutes intervals, and subtract the number of ask from the number of bid transaction (OF in this paper). If this number is positive, the number of selling transaction of JPY/USD rate is more than that of buying transaction in that time interval.

This indicator is simply showing the number of differences between buying and selling transaction. Trading volume also has impact on price movement. Bigger volume usually has bigger impact on price movement. We sum up the total volume of bid transaction and ask transaction in each time interval and subtract latter amount from former amount. This amount can be recognized as net trading volume (OFVOL in this paper). If this amount is positive, ussion in the last section. total selling volume in this interval is more than buying trading volume. This means downward pressure to JPY/USD might be stronger in this interval. These two buying or selling indicators can be worked as a proxy of the order flow.

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