STRATEGY FX

Are price updates a good proxy

for actual traded volume in FX?

Introduction definitive, real-time, volume information readily

The objective of this article is to analyse the relationship available.
between actual traded volume in the FX markets and its
relationship to price updates, or ‘tick’ volume, over both By contrast, the FX markets are incredibly fragmented,
time and across currency pairs, to determine whether traded between banks, financial institutions, hedge
there is a high correlation between the two. funds, proprietary trading firms and individual traders
We do not believe that on a twenty-four hour
the research has been basis through a vast
published before. Given array of Electronic
the conclusive results, Communication
we hope it proves an Networks (ECN’s)
interesting addition and direct inter-bank
to the debate, as to relationships.
whether tick volume Therefore, there is
can be used as a proxy no way to accurately
for traded volume in record total FX volume
the FX markets. in real time, as there is
in the financial Futures
FX versus Futures markets, hence the
markets debate as to whether
Volume information has the number of price
been proven in many updates can be used as
studies to provide an edge a proxy for volume.
in trading. FX Traders
have therefore been at a The FX markets are incredibly Price Updates as a
disadvantage to Futures
traders, as volume
fragmented; therefore there Proxy for Volume
One way that activity
information is not been is no way to accurately record can be gauged in
readily accessible in the the FX market is by
FX markets, let alone in total FX volume in real time recording the number
real-time. of price updates, per
As discussed in previous unit of time, as more
articles, Futures markets, by definition, are traded on trades should equate to more price updates. However,
an exchange. Therefore, all transactions for a particular there has been a great deal of debate about the accuracy
instrument are traded on a central exchange making of price updates as a proxy for volume and there are

FX TRADER MAGAZINE April - June 2011 9

 FX STRATEGY

currencies, both against the tick volume provided by eSignal

and, in the case of HotSpot, against its own internal tick volume.
The currencies chosen for this research were EURUSD,
USDJPY, GBPUSD and EURCHF. We would look for
correlation first visually, then through the use of traditional
measures such as Pearson’s product-moment coefficient.

Once the data provided by HotSpot and EBS had been

cleaned and structured, the timestamp for each trade in
any currency pair was used to determine which hour of the
day the trade took place within. The volume of each trade
was then placed in one of 24 ‘buckets’, creating a histogram
of traded volume by hour of day; readers familiar with the
Marney Indicators™ will quickly recognise the profile. These
many valid reasons to suggest that there might not be a
profiles were created for each month and then combined to
high correlation:
provide an overall profile across the whole data set:
• The price may move without any volume; if for
example, there has just been a news announcement.
• The price may change many times on light volume, or
not at all on high volume, if a large buyer trades with a seller of
equal size.
• If the range for a unit of time (represented by a bar
on a chart) is high, then the price is more likely to change
many times, to reflect the many changes in price, regardless
of volume
• Similarly, if the range is small, then there will likely
be relatively fewer price changes than a bar with equal volume
that had a large change in price.

Actual Volume vs. Price Updates Analysis EURUSD % of Daily Volume by Hour, month-on-month

With volume analysis potentially able to provide such a

significant edge to trading decisions, we were surprised that we
couldn’t find the research having been done anywhere before,
to provide a definitive answer to the debate.
Therefore, with data from two of the world’s largest ECN’s,
HotSpot® and EBS®, as well as one of the leading providers
of price updates, Interactive Data, we had a large database of
both actual traded volume data, as well as the respective price
updates, to determine how high the correlation was between
the two, and whether it was consistent over time.
In order to establish conclusive correlation between tick
volume and traded volume, it was decided that the data from
two separate vendors would be analysed across a range of % of Daily Volume by Hour for all sampled currency pairs

10 FX TRADER MAGAZINE April - June 2011

 STRATEGY FX

Tick volume data was exported from eSignal, for the

time periods determined by our trade volume data; upon
its arrangement into the same buckets we were then able
to look at the direct correlation between tick volume and
the relevant trade volume:

EURUSD Trade Volume against Average Ticket size by Hour

In order to confirm what can be seen visually, the correlation

was analysed mathematically; results can be seen below:

EURUSD USDJPY GBPUSD EURCHF

EURUSD Trade Volume by Hour vs Internal and Market-wide Tick Volume
Pearson 0.9683 0.9583 0.9894 0.9714
r2 93.8% 91.8% 97.9% 94%

*The Pearson product-moment correlation coefficient (typically

denoted by r) is a measure of the correlation, or linear
dependence, between two variables X and Y. r returns a value
between +1 and -1 inclusive, with 1 and -1 values indicating
absolute positive and negative correlation and zero indicating
absolute independence.

/ n
^ Xi - X h^Yi - Y h
r= i=1

/ n
i=1
^ Xi - X h2 / n
i=1
^Yi - Y h2
EURCHF Trade Volume by Hour vs Tick Volume by Hour
The square of the coefficient (r2) is equal to the percentage of
the variation in X that is related to the variation in Y. An
It is clear from the results illustrated that there is a r value of 0.9683 tells us that 93.8% of the variance of tick
definite and constant correlation between trade volume volume in EURUSD is shared by trade volume.
in any hour and the number of tick updates within that
time. Readers will note from the above charts that trade From our analysis of these four currency pairs, we could
volume appears to outperform tick volume on a like-for- postulate that over 90% of movement in tick volume in any
like basis during peak hours; we attribute to the fact that currency pair is reflected in the movement of actual traded
the average ticket size is greater during these hours, as volume, ie. If tick volume is seen to be increasing, traded
shown below: volume will be increasing in a very similar manner.

FX TRADER MAGAZINE April - June 2011 11

FX STRATEGY

From a statistical standpoint, participants in the over shorter time periods.

foreign exchang e markets should feel safe to use It is this relationship that led to the development of
tick volume as a proxy for actual traded volume. the Marney Volume Indicator™ (MVI) and Marney
This has fairly significant implications, as it allows Range Indicator (MRI), first published in FX
traders to use volume-derived studies and measures Trader Magazine ( July-September 2010 edition).
in OTC markets that have previously been reser ved We have found the indicators ver y useful additions
for exchange-traded securities. to our own proprietar y trading.
For those wishing to analyse volume further, both
Conclusion the MVI and MRI are now available on Trade
Despite the many ver y valid arg uments, which Interceptor, MultiCharts and Tradermade.
suggest that price updates may not be highly
correlated to actual traded volume, the correlation Caspar Marney
is actually ver y high, when looking at hourly data.
I would like to thank HotSpot and EBS, without
We can therefore conclude that using price updates whose data the analysis would not have been possible
as a proxy for actual traded volume in the FX and especially to my assistant, John Kinnell, for the
markets is ver y valid over this time scale. More many hours spent analysing the data and producing
research is needed to determine the correlation the illustrations.

FX TRADER MAGAZINE April - June 2011 12