The Microstructure Approach to Exchange Rates (a review)

Abstract

This thought-provoking introduction to the dynamic foreign exchange market proposes a framework for explaining currency moves by applying work on exchange rate economics, information economics, and order flow to the microstructure of markets.

Notes

¹The fact that there is neither an exchange nor regulation does not mean that no rules exist. Conventions for trading practices and self-governing behavior are present in the FX market as well as in the highly decentralized bond markets.

²Flow information is available from Citicorp, Deutsche Bank, J.P. Morgan Chase and Company, and State Street Bank and Trust Company, to name just a few. It has become an important part of the toolbox available to clients. Each bank markets itself on the strength of its market share and its ability to provide a good snapshot of current and cumulative order flow. Some banks specialize in their ability to provide access to real-money equity trading; others focus on broad market share. How the order-flow data can be aggregated and processed is currently one of the leading questions in practical FX research.