Order flow, bid-ask spread and trading density in foreign exchange markets

► We examine the implications of market microstructure for foreign exchange markets. ► We discuss why liquidity and trading density are involved in the order flow model. ► The order flow is inadequate to explaining the low trading density currency return. ► Both order flow and bid-ask spread affect the high trading density currency return. ► The order flow model is better at incorporating the liquidity and trading density.