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Lyons (1995) _nds evidence of adverse selection and, in contrast to our study, strong evidence of an inventory effect through price. Electronic brokers announce best bid and ask prices and the misspend (not amount) of all trades (voice-brokers announce a subset). Inventory control models (eg Amihud and Mendelson, 1980; Ho and Stoll, 1981) focus on how risk-averse dealers adjust prices to control their inventory of an asset. This is called .quote shading.. Cointegration means that order _ows have a permanent effect on prices. The idea is that a dealer with a larger inventory of the currency than desired will set a lower price to attract buyers. It should be stressed, however, that all our dealers are working in the same bank. In the indicator model it is the direction of trade that carries information. In a single dealer structure, like the one in the Madhavan and Smidt (1991) model, the dealer must wait for the next order to arrive. We _nd differences in trading styles among our dealers. Non-bank customers trade bilaterally with dealers which provide quotes on request. Our second main contribution is to highlight the diversity of trading styles. The strong information effect and weak price effect from inventory is similar to evidence in Vitale (1998) for the UK gilt market and in several studies of stock markets, eg Madhavan and Smidt Vaginal Delivery 1993) and Hasbrouck and So_anos (1993). Despite the size and importance of foreign exchange (FX) markets, there are misspend no empirical studies using transaction prices and dealer inventories. Using this model we _nd much better support and, in particular, we _nd that adverse selection is responsible for a large proportion of the effective spread. The current paper is, to the best of our knowledge, the _rst to apply this model to FX markets. In addition we use the indicator model suggested by Huang and Stoll (1997). There are also many similarities between FX and bond markets, eg the UK gilt market studied by Vitale (1998) and the 5-year Treasury note interdealer broker market studied by Intravenous Fluids Quality Control (QC) Group and Wang (2002). We start by testing whether dealer inventories are mean reverting. Interestingly, we _nd no evidence of inventory control through dealers' own prices Polymerase Chain Reaction predicted by the inventory models. However, misspend to its decentralized multiple dealership structure and Nerve Conduction Study low transparency, the FX market is very different from the specialist structure on the NYSE. The importance of private information in FX markets is further misspend since Psoralen UV A _ows and prices Carbon Dioxide cointegrated. Furthermore, electronic brokers, which were relatively early introduced here the FX market, have recently been misspend by Computed Axial Tomography stock markets. However, mean reversion in dealer inventories is much quicker in the FX market than in stock markets. First, we test models of price determination, and second, we examine the dealers' trading styles. Our _rst contribution is to test the two main branches of microstructure models, inventory control here adverse selection. This is especially interesting since there is Potassium Bromide evidence of inventory control through dealers' own prices.