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November/December 1991, 
Vol. 73, No. 6
Posted 1991-11-01

Microstructure Theory and the Foreign Exchange Market

by Mark D. Flood

Mark D. Flood reviews the theoretical literature on market microstructure to see what lessons it holds for the foreign exchange market. Microstructure theory is of interest to students of the foreign exchange market, says the author, because it can yield insights into dealers’ behavior and the impact of institutional arrangements. Conversely, the foreign exchange market is of interest to students of microstructure, because it combines two very different methods of matching buyers and sellers—bank dealers trade both directly and through brokers.