Bid-Ask Spreads in Foreign Exchange Markets: Implications for Models of Asymmetric Information

By David A. HsiehAllan W. Kleidon
1994| Working Paper No. 1307

The term “market microstructure” was coined in 1976 by Mark Garman to define “moment-to-moment trading activities in asset markets” (1976, Abstract). With the stated goal of providing insight and testable implications regarding the transaction-to-transaction nature of realistic exchange processes. Garman examines dealership and auction models of market makers where the stream of market orders from a collection of market agent is depicted as a stochastic Poisson process. The resulting insights concern bid-ask spreads (based on standard micro-economic analysis), inventories of market makers, and the effect of some market power on the part of market makers.