Signal and noise in the FX market

In our latest research article we explore a method for attempting to estimate how ‘informed’ the trading activity is in the FX market over a given period of time.

This method is based on the VPIN metric, or Volume Probability of Informed Trading, which has been applied in other asset classes. Using VPIN in OTC markets such as FX is more challenging due to the lack of absolute volume numbers, and moreover, within FX the diverse set of trading objectives (e.g. hedging, funding, retail etc) which add additional noise.

However, in this paper we explore a method for computing this metric using an approximation of volume and discuss potential applications. The initial results do appear intuitive, for example, we observe an increasing proportion of ‘informed’ trading leading up to the 4pm WMR Fix. Our research into this field will continue as we think there are potential applications in enhancing our Pre-Trade module further e.g. in selecting an execution protocol or algo, or determining how long to run an algo for, or how passive to be etc.

Please email contact@bestx.co.uk if you are a BestX client and would like to receive a copy of the paper.