STRATEGIC TRADING IN A 2-SIDED FOREIGN-EXCHANGE AUCTION

The market microstructure chosen for foreign exchange markets can infl uence trading volumes and equilibrium exchange rates. With emerging ma rkets and developing countries increasingly utilizing two-sided auctio ns, we show that the choice of the discrete 'tatonnement' auction crea tes incentives for strategic behavior among market participants. Theor etical predictions on strategic under-revelation of demand or supply p ositions are supported empirically using detailed data from a rare exa mple of a tatonnement market, the Moscow Interbank Currency Exchange. Our results suggest that market microstructures should be introduced a longside more traditional asset-market fundamentals in studies of fore ign exchange market activity, especially in developing countries.