MICROSTRUCTURAL DYNAMICS IN A FOREIGN-EXCHANGE ELECTRONIC BROKING SYSTEM

This paper explores the relationships between quotations, spreads and transactions in the Foreign Exchange market. Such interactions have be en the subject of much work in markets such as the NYSE, but until now have gone unexamined in the FX market owing to a lack of data. Using a 7 hour, transactions-based data set we examine the determinants of b oth quote revisions and spreads. The results indicate that trades are a major factor in spread determination and quote revisions. Furthermor e, there is evidence that the widely documented negative auto-correlat ion in quote returns is at least partially caused by the 'thinness' of this particular segment of the FX market. (JEL F31). Copyright (C) 19 96 Elsevier Science Ltd.