FINANCE

Market Microstructure



Introduction3

Definition and Basic Idea of Market Microstructure3

Issues and Factors4

The Structure and the Design of the Market4

The Formation of the Price and the Discovery4

Timing and the Transaction Costs5

Information and the Disclosure of the Information5

High-Frequency Market Manipulation6

Market Taxonomy and Trading Systems6

Dealer Markets7

Agency Markets7

Continuous Markets7

Literature Review8

Informed and Informed Traders8

Information and the Disclosure of the Information9

Market Microstructure and Other Aspects of Finance10

Conclusion11

Market Microstructure

Introduction

A branch of finance that deals with the exchanges that are occurring in the market and what are the details of these exchanges is market microstructure. When one talks about the theory of the market microstructure, it is something that is applicable to the exchange of all the financial assets, these assets are either the real tangible assets or financial assets. The evidence and all the data about all the exchanges is gathered from the financial markets and they way they are functioning. When one talks about the major thrust of the market structure, it examines that ways in which the working processes that are affecting determinates of the transaction costs. Some of the other things that are considered are the prices, quotes, the overall volumes of the trading.

Definition and Basic Idea of Market Microstructure

There are ways one can define the market microstructure. One of the possible definitions is that it is the study of all the processes as well as the outcomes of the exchanges that are occurring during the subsequent exchange of the assets. Most of the economic literature is such that it abstracts from the overall methods of trading, while on the other hand, the microstructure theory focuses on how some of the specific mechanisms and methodologies of trading are affected during the process of price formation (Madhavan, 2000, p.258). There is another alternative point of view that explains that market microstructure.

Issues and Factors

There are many issues that are needed to be looked at when one talks about the overall design, the price structure and the price formation of the assets. The transaction and the timing costs of the exchanges is also something that is needed to be looked at (Hasbrouck, 2002, p.339). The information and the disclosure of the information as well as the makers of the market and the way investors are behaving is something that is needed to be looked at.

The Structure and the Design of the Market

The factor that talks about the eventual relationship between the price discrimination and the trading rules is one of the bigger issues that is needed to be looked at. When one looks at some of the markets, most of the assets are traded with the help of the dealers who are keeping an inventory (Hansen & Lunde, 2006, p.127). On the other hand, there are some markets that are dominated by brokers and sellers who are functioning as intermediaries between the parties. The important question that is needed to be answered in the market microstructure is that which structure is more efficient.

The Formation of the Price and the Discovery

This is the factor that ...