Currency traders and exchange rate dynamics: a survey of the US market

Abstract

We report findings from a survey of United States foreign exchange traders. Our results indicate that: (i) in recent years electronically-brokered transactions have risen substantially, mostly at the expense of traditional brokers; (ii) the market norm is an important determinant of interbank bid-ask spread and the most widely-cited reason for deviating from the conventional bid-ask spread is a thin/hectic market; (iii) half or more of market respondents believe that large players dominate in the dollar-pound and dollar-Swiss franc markets; (iv) technical trading best characterizes about 30% of traders, with this proportion rising from five years ago; (v) news about macroeconomic variables is rapidly incorporated into exchange rates; (vi) the importance of individual macroeconomic variables shifts over time, although interest rates always appear to be important; (vii) economic fundamentals are perceived to be more important at longer horizons, while short-run deviations from the fundamentals are attributed to excess speculation and institutional customer/hedge fund manipulation; (viii) speculation is generally viewed positively, as enhancing market efficiency and liquidity, even though it exacerbates volatility; (ix) central bank intervention does not appear to have substantial effect, although there is general agreement that it increases volatility, and finally; (x) traders do not view purchasing power parity as a useful concept, even though a significant proportion (40%) believe that it affects exchange rates at horizons of over six months.

Chartism and exchange rate volatility

“…That chartism is extensively used in currency trade has also been con…rmed by Menkho¤ (1997), who conducted a survey in August 1992 on the German market, by Lui and Mole (1998), who conducted a survey in February 1995 on the Hong Kong market, by Oberlechner (2001), who conducted a survey in the spring 1996 on the markets in Frankfurt, London, Vienna and Zurich, and by Cheung and Chinn (2001), who conducted a survey between October 1996 and November 1997 on the U.S. market. A general observation in these surveys is that a skew towards reliance on technical, as opposed to fundamental, analysis at shorter time horizons was found, which became gradually reversed as the length of the horizon considered was increased.…”

Sterilized Foreign Exchange Market Interventions in a Chartist-Fundamentalist Exchange Rate Model

“…More recently, , and Cheung and Chinn (2001) systematically analyzed the British, Asian and American foreign exchange markets by using questionnaires. Their results with respect to the importance of 'irrational' factors determining the expectations formation of market participants are summarized in Table 1.…”

Foreign Exchange Market: Institutional Structure, Regulation, and Policy Implications

“…Before the mid-1990s, roughly half of the interdealer trading was conducted via direct dealing, for example, a dealer needing liquidity could ask for a quote from another dealer, while the other half was conducted in a limit order market where orders were placed and matched through voice brokers [26]. A dealer who wants to supply liquidity will place a limit order, which specifies the price at which he/she is willing to buy (the "bid") or sell (the "ask") for a certain amount of currencies.…”

“…Coupled with the absence of government regulation and market share concentration, the manipulations in the FX market have a substantial impact on the trading practice and behaviour of market participants. For example, when asked what causes exchange rates to deviate from fundamental values, 68% of US dealers blame institutional customers and hedge fund manipulations [26].…”