In this paper, we compare price discovery in the foreign exchange futures and spot markets during a period in which the spot market was less transparent but had higher volume than the futures market. We develop a foreign exchange futures order flow measure that is a proxy for the order flow observed by Chicago Mercantile Exchange pit traders. We find that both foreign currency futures and spot order flow contain unique information relevant to exchange rate determination. When we measure contributions to price discovery using the methods of Hasbrouck (1995) and Gonzalo and Granger (1995), we obtain results consistent with our order flow findings. Taken together, our evidence suggests that the amount of information contained in currency futures prices in 1996 is much greater than one would expect based on relative market size. Using data from 2006, we obtain quite different results, perhaps because of an increase in spot market transparency. In particular, we find in our more recent sample that the spot market has the dominant information share.
price discovery, exchange rates, order flow, futures, microstructure, foreign exchange