In light of the market microstructure literature, we have compared the two main FX (foreign exchange) markets in Brazil: the spot market and the futures market (the next to mature contract). Our objective is to identify in which market FX rate is determined. We analyze FX markets at its micro level: its institutions and its players' asymmetries. We use a unique database that contains 100% of the bids, asks and of the deals of both the futures market and the interbank spot market from 02-Jan-06 to 31-May-2007. It is shown that the futures market is much more liquid than the spot market in Brazil. We also show that the FX rate is determined firstly at futures market, being then transmitted by arbitrage to the spot market. We conclude that FX markets in Brazil have a unique configuration in the World. A short historical review of the development of the Brazilian FX market explains why such idiosyncrasy developed in Brazil.
