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Regulating Market Microstructure

Author

Listed:
  • Thomas H. Ernst

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland, USA)

  • Chester S. Spatt

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania, USA
    National Bureau of Economic Research, Cambridge, Massachusetts, USA)

Abstract

This article provides an overview of the regulation of market microstructure, particularly in equity and option markets. We emphasize the motives for regulation and restrictions on the trading process, including the distinctive regulatory environments (and regulators) for different financial instruments as well as the role of brokers in routing trades, and market makers who intermediate trade. Our article highlights such central features of the design of markets as best execution responsibilities; order protection (trade-through) restrictions (Regulation NMS); payment for order flow, tick size, and access fees; and the role of auctions, transparency, and short-selling restrictions. We point to some of the distinctive features of fixed-income trading and market design and the emerging role of litigation in determining regulatory outcomes.

Suggested Citation

  • Thomas H. Ernst & Chester S. Spatt, 2025. "Regulating Market Microstructure," Annual Review of Financial Economics, Annual Reviews, vol. 17(1), pages 173-187, November.
    • Handle: RePEc:anr:refeco:v:17:y:2025:p:173-187
    DOI: 10.1146/annurev-financial-112923-112656
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    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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