In every market, there are buyers and sellers. Both the buyers and sellers are usually in competitive environments, where the power of negotiation and access to information would greatly impact what they capture as values. Globally, foreign exchange market has buyers and sellers, and regulators such as the Central Banks and other agencies saddled with the responsibility of ensuring sustainable performance of the national currencies against the global ones.
Access to adequate information helps the participants in making informed decisions during trading times. Apart from the fact that apex banks are expected to be the main key information disseminators about the exchange rate, news media and information portals with the focus of providing daily foreign exchange information are also others expected to feed the public. However, it is logical that news media and others source their information from the apex banks, being the main regulators.
This seems not to be the ideal as the recent events, especially in the developing worlds, indicate gathering and dissemination of market information from parallel markets. Since forex is mostly influenced by the forces of supply and demand, it is expected that information that certain participants have and others do not have would help them in gaining competitive advantage within the context of buying and selling of currencies. Whereas, having the same information would benefit all the market participants.
Having information that others do not have has been described as information asymmetry, while having the same information others possess mean information symmetry. In both situations, as stressed earlier, there are positive and negative gains to all the participants.
Recently, through the Central Bank, the Nigerian government noted that Aboki FX, a platform that provides foreign exchange information, is causing Naira dwindling every day. This has been previously analysed by our analyst. Meanwhile, if the second allegation of the bank against the platform, that the founder engages in the forex business is true, it means he is taking advantage of his access to some other aspects of the data the platform gathers and disseminates daily.
There are a number of researches that establish the consequences of information asymmetry in the foreign exchange market. For example, asymmetric information is pervasive across currency pairs, blockchain transaction activity is a relevant aspect of Bitcoins microstructure, as informed traders make use of the information in general and adjust their expectations based on the degree of information asymmetry and the asymmetric impact of exchange rate changes on the demand for Korean Won.
The underlying transparency of the Bitcoin blockchain allows transactions in the network to be tracked in near real-time. When someone transfers a large number of Bitcoins, the market receives this information and traders can adjust their expectations based on the new information. This paper investigates trading volume and its relation to asymmetric information around transfers on the Bitcoin blockchain. We collect data on 2132 large transactions on the Bitcoin blockchain between September 2018 and November 2019, where 500 or more Bitcoins were transferred. Using event study methodology, we identify significant positive abnormal trading volume for the 15-minute window before a large Bitcoin transaction as well as during and after the event. Using public information about Bitcoin addresses of cryptocurrency exchanges as proxies for information asymmetry, we find that transactions with high levels of information asymmetry negatively affect abnormal trading volume once the event becomes public knowledge, while some effects are even opposite for transactions with lower information asymmetry. The results show that blockchain transaction activity is a relevant aspect of Bitcoinns microstructure, as informed traders make use of the information in general and adjust their expectations based on the degree of information asymmetry.
Editor’s Note: In a subsequent piece, relevant insights that emerged from robust data analysed and established impacts of the two information categories will be published.