Central Bank Communication Choices: Adverse Selection, Volatility and Liquidity in a Market With Fast and Slow Traders

We study the impact of different central bank communication practices on the trading behavior and profitability of fast and slow traders in the foreign exchange market. We focus, in particular, on how the Bank of Japan's practice of introducing some randomness to the time at which it releases its monetary policy statement affects the behavior and profitability of high-frequency traders, and how that differs from the impact of the fixed release time used by the Federal Reserve and the European Central Bank. We also analyze the relative impact on fast and slow trader behavior of central bank press conferences and statement releases. We relate our findings to the broader discussion of how information asymmetry affects fast and slow traders in a market in which they coexist, and how market quality is affected by their interaction.