Clarification of mechanism underlying price formation process in a forex market on the basis of clustering of position management strategies

Abstract

Individual trading analysis has become the focus of recent attention in the field of market microstructure. Several research works reveal how trading strategies of specific traders or banks are affected by historical market information. However, there is little research revealing how such microscopic trading strategies recursively affect macroscopic future market information. Using the high-granular dataset including the trading behavior of specific banks in a U.S dollar (USD) against Japanese yen (JPY) market, here we demonstrate management method of positions, defined as the numbers of units of USD banks bought or sold against JPY, can be clearly clustered into two simple strategies. We then find the strong relationship between future-market price movements and these two position management strategies, and this relationship even allows a prior prediction of market prices fifteen minutes ahead.