The market microstructure chosen for foreign exchange markets can influence trading volumes and equilibrium exchange rates. With emerging markets and developing countries increasingly utilizing two- sided auctions, we show that the choice of the discrete 'tatonnement' auction creates incentives for strategic behavior among market participants. We provide theoretical predictions on strategic under-revelation of demand or supply positions that are supported empirically using detailed data from a rare example of a tatonnement market, the Moscow Interbank Currency Exchange. Our results are also consistent with findings from experimental work on auctions: new entrants altered strategic behavior mainly on the market's demand side, without comparable implications for the supply side. We also show that bids and offers were influenced by fundamentals and specific policy measures.
 

JEL Codes: D44, F31