One minute in the life of the DM/US$: Public news in an electronic market

Public news can be expected to change market prices but, unlike “public information,” there are differing expectations about the impact. Hence trading is necessary for the market to process these divergent views. A surprise announcement of an increase in German interest rates coupled with concurrent transactions data enables us to study in detail dealers' reactions. The patterns observed are consistent with dealers' practice to book targeted profits immediately if possible in the face of uncertainty. Evidence also shows that the speculative activity by traders in initial reaction to the news destabilized the market for the next 2 h.