The Long Memory of Order Flow in the Foreign Exchange Spot Market

TL;DR

This study demonstrates that order flow in the FX spot market exhibits persistent long memory, with a Hurst exponent around 0.7, confirmed across multiple days and robust against structural breaks.

Contribution

It provides the first stable, day-by-day empirical evidence of long memory in FX order flow, confirming its robustness and ruling out structural break artifacts.

Findings

Strong long memory with Hurst ~0.7 across currencies

Results are consistent across different trading days

Long memory is not caused by structural breaks

Abstract

We study the long memory of order flow for each of three liquid currency pairs on a large electronic trading platform in the foreign exchange (FX) spot market. Due to the extremely high levels of market activity on the platform, and in contrast to existing empirical studies of other markets, our data enables us to perform statistically stable estimation without needing to aggregate data from different trading days. We find strong evidence of long memory, with a Hurst exponent of approximately 0.7, for each of the three currency pairs and on each trading day in our sample. We repeat our calculations using data that spans different trading days, and we find no significant differences in our results. We test and reject the hypothesis that the apparent long memory of order flow is an artifact caused by structural breaks, in favour of the alternative hypothesis of true long memory. We therefore conclude that the long memory of order flow in the FX spot market is a robust empirical property that persists across daily boundaries.