This paper describes the structure and microeconomics of the foreign exchange market. It begins by outlining the major participants and the instruments they trade, highlighting the vast institutional changes that accompanied the emergence of electronic trading since the 1990s. It then discusses...

This paper investigates how active price-contingent trading contributes to extreme returns even in the absence of news. Price-contingent trading, which is common across financial markets, includes algorithmic trading, technical trading, and dynamic option hedging. The paper highlights four...

This paper examines the price discovery process in currency markets, basing its analysis on the pivotal distinction between the customer (end-user) market and the interdealer market. It first provides evidence that the price discovery process cannot be based on adverse selection between dealers...

This paper tests the influential hypothesis, typically attributed to Friedman (1953), that irrational traders will be driven out of financial markets by trading losses. The paper’s main finding is that overconfident currency dealers are not driven out of the market. Traders with extensive...

Looking back, 30 years of research on foreign exchange (FX) market microstructure reveals that order flow, heterogeneity among agents, and private information are crucial determinants of short-run exchange rate dynamics. Microstructure researchers have produced empirically-driven models that fit...

We analyze currency trading between custody banks and their client funds, a trading situation notable for extreme opacity and ongoing legal disputes about reputedly high markups. We propose a “shrouding” model of liquidity provision in which prices are set relative to the day’s extrema to...

Currency trading is a vast and highly profitable business. This paper examines the profitability of two popular currency trading strategies in light of currency-market microstructure research. The carry-trade strategy involves borrowing a low-interest currency and investing the proceeds in a...