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Market Microstructure Approach: A Review of Basic Concepts and Practices
[Концепции И Практика Микроструктурного Подхода]

Author

Listed:
  • Mayorov, Sergey (Майоров, Сергей)

    (Moscow Exchange)

Abstract

The article gives an overview of the market microstructure approach, where modern financial infrastructure (trading, clearing and settlement) has for the first time become an object of dedicated research, contrary to traditional microeconomic models dealing with abstract demand, supply etc. apart from market realities. The market microstructure approach focuses on analysis of market frictions impacting on how new equilibriums are being come upon. Market frictions exist due to fragmented market structure and information asymmetries. Respectively, the article (Part 1) compares “market microstructure” and “market structure”; reveals drivers of spatial and temporal fragmentation (including breakdown of modern trading protocols and participation models); analyzes information (self-) learning of market and adverse selection; makes distinctions between “market quality”, “market efficiency” and “market liquidity”; and traces how the market efficiency and equilibrium concepts were evolving when market frictions drew attention. How the market microstructure approach may work is demonstrated in the course of a high-frequency trading (HFT) case study in Part 2 of the article. HFT has brought new evidence that market structure matters—both as an environment where tech innovations are only possible and as mechanisms to be adjusted to new challenges—and has outlined directions for further elaborations on basic microstructural concepts. The article associates HFT with market fragmentation, describes the impact of HFT on participation structure and market quality, summarizes predatory and similar practices of HFT and instruments to mitigate them, and clarifies the specifics of information asymmetry and adverse selection within the HFT framework.

Suggested Citation

  • Mayorov, Sergey (Майоров, Сергей), 2019. "Market Microstructure Approach: A Review of Basic Concepts and Practices [Концепции И Практика Микроструктурного Подхода]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 110-141, April.
    • Handle: RePEc:rnp:ecopol:ep1912
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    References listed on IDEAS

    as
    1. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    2. Craig Pirrong, 2002. "Securities Market Macrostructure: Property Rights and the Efficiency of Securities Trading," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 18(2), pages 385-410, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    market microstructure; market structure; market quality; efficiency and liquidity; information asymmetry; high-frequency trading.;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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