Persistence, Performance and Prices in Foreign Exchange Markets

Using detailed data on currency transactions of institutional investors, this paper shows that funds that experience high returns on their currency holdings also execute currency trades at more favourable prices. This observation is consistent with foreign exchange dealers bidding for information from successful traders. If true, this provides little incentive for successful funds to intertemporally split orders to avoid tipping off dealers. In accordance with this, the paper finds that better performing funds have less persistent currency order flow. These results are consistent with the theoretical model of Naik, Neuberger and Viswanathan [1999]. The results can also be explained by the funds acting as secondary providers of liquidity in these markets, or by dealers perceiving that funds have different price elasticities of demand for currencies, and pricing accordingly.