In: Handbook of the Economics of Finance
Market microstructure deals with the purest form of financial intermediation -- the trading of a financial asset, such as a stock or a bond. In a trading market, assets are not transformed but are simply transferred from one investor to another. The field of market microstructure studies the cost of trading securities and the impact of trading costs on the short-run behavior of securities prices. Costs are reflected in the bid-ask spread (and related measures) and in commissions. The focus of this chapter is on the determinants of the spread rather than on commissions. After an introduction to markets, traders and the trading process, I review the theory of the bid-ask spread in Section 3 and examine the implications of the spread for the short-run behavior of prices in Section 4. In Section 5, the empirical evidence on the magnitude and nature of trading costs is summarized, and inferences are drawn about the importance of various sources of the spread. Price impacts of trading from block trades, from herding or from other sources, are considered in Section 6. Issues in the design of a trading market, such as the functioning of call versus continuous markets and of dealer versus auction markets, are examined in Section 7. Even casual observers of markets have undoubtedly noted the surprising pace at which new trading markets are being established even as others merge. Section 8 briefly surveys recent developments in securities markets in the USA and considers the forces leading to centralization of trading in a single market versus the forces leading to multiple markets. Most of this chapter deals with the microstructure of equities markets. In Section 9, the microstructure of other markets is considered. Section 10 provides a brief discussion of the implications of microstructure for asset pricing. Section 11 concludes.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|This chapter was published in: ||This item is provided by Elsevier in its series Handbook of the Economics of Finance with number
1-09.||Handle:|| RePEc:eee:finchp:1-09||Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description |
When requesting a correction, please mention this item's handle: RePEc:eee:finchp:1-09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.