Most of the existing empirical literature on FX market microstructure uses indicative quote data derived from Reuters EFX screens. This paper examines the adequacy of such data as proxies for firm, tradeable quotes. We present a comparison of prices (and volumes) derived from Reuters D2000-2 electronic inter-dealer broking system with contemporaneous data from EFX. Tick-by-tick data is available from both sources, covering October 6-10, 1997. Our main comparative results are as follows. EFX midquote returns are consistently more volatile than their D2000-2 counterparts and display strong moving average effects which are not present in the D2000-2 returns. EFX spreads bear little or no relation to the inside spreads derived from D2000-2. In terms of information flows, D2000-2 returns lead those on EFX by up to 3 minutes and, further, contribute around 90% of all information imp impounded in quotes. A bivariate GARCH analysis also indicates a dominant role for D2000-2 in price discovery. On the positive side, however, EFX quotation frequency correlates well with D2000-2 transaction frequency.
