A stylised fact, now routinely recorded in the empirical literature on exchange rate determination, is that, while macroeconomic fundamentals – variables such as relative money supply or relative velocity of circulation, for example – appear to be important determinants of exchange rate movements over relatively long horizons and in economies experiencing pathologically large movements in such fundamentals (such as during a hyperinflation), there seem to be substantial and often persistent movements in exchange rates which are largely unexplained by macroeconomic fundamentals (Frankel and Rose, 1995; Taylor, 1995; Flood and Taylor, 1996). The recent and emerging literature on foreign exchange market microstructure therefore reflects, in some measure, an attempt by researchers in international finance to understand the mechanisms generating these deviations from macroeconomic fundamentals which appear to characterise exchange rate movements (Taylor, 1995; Flood and Taylor, 1996; Lyons, 1999). At the same time, the microstructure literature is also concerned with other issues which are seen to be of interest in their own right by international financial economists, such as the transmission of information between market participants, the behaviour of market agents, the relationship between information flows, the importance of order flow, the heterogeneity of agents' expectations and the implications of such heterogeneity for trading volume and exchange rate volatility.

The approach followed by the microstructure literature is often quite different from the conventional macroeconomic approach to exchange rate modelling in both its assumptions and its methodology.