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Market microstructure

In: Handbook of the Economics of Finance

Author

Listed:
  • Stoll, Hans R.

Abstract

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.

Suggested Citation

  • Stoll, Hans R., 2003. "Market microstructure," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 9, pages 553-604, Elsevier.
  • Handle: RePEc:eee:finchp:1-09
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    Citations

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    Cited by:

    1. Ginglinger, Edith & Hamon, Jacques, 2007. "Actual share repurchases, timing and liquidity," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 915-938, March.
    2. Kushankur Dey & Debasish Maitra, 2012. "Price discovery in Indian commodity futures market: an empirical exercise," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 5(1), pages 68-87.
    3. Lamoureux, Christopher G. & Wang, Qin, 2015. "Measuring private information in a specialist market," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 92-119.
    4. Visaltanachoti, Nuttawat & Yang, Ting, 2010. "Speed of convergence to market efficiency for NYSE-listed foreign stocks," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 594-605, March.
    5. Anderson, Steve & Friedman, Daniel & Milam, Garrett & Singh, Nirvikar, 2004. "Buy it Now: A Hybrid Internet Market Institution," Santa Cruz Department of Economics, Working Paper Series qt21d715v9, Department of Economics, UC Santa Cruz.
    6. Willis, Geoff, 2011. "Why money trickles up – wealth & income distributions," MPRA Paper 30851, University Library of Munich, Germany.
    7. repec:dau:papers:123456789/2709 is not listed on IDEAS
    8. Kovner, Anna, 2012. "Do underwriters matter? The impact of the near failure of an equity underwriter," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 507-529.
    9. repec:eee:finmar:v:35:y:2017:i:c:p:1-20 is not listed on IDEAS
    10. Chung, Huimin, 2006. "Investor protection and the liquidity of cross-listed securities: Evidence from the ADR market," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1485-1505, May.
    11. Bollen, Nicolas P. B. & Smith, Tom & Whaley, Robert E., 2004. "Modeling the bid/ask spread: measuring the inventory-holding premium," Journal of Financial Economics, Elsevier, vol. 72(1), pages 97-141, April.
    12. Loderer, Claudio & Roth, Lukas, 2005. "The pricing discount for limited liquidity: evidence from SWX Swiss Exchange and the Nasdaq," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 239-268, March.
    13. BEAUPAIN, Renaud & GIOT, Pierre & PETITJEAN, Mikael, 2006. "Market-wide liquidity co-movements, volatility regimes and market cap sizes," CORE Discussion Papers 2006102, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Hertrich, Markus, 2015. "Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets," MPRA Paper 67837, University Library of Munich, Germany.
    15. repec:dau:papers:123456789/1748 is not listed on IDEAS
    16. Chung, Dennis Y. & Hrazdil, Karel, 2012. "Speed of convergence to market efficiency: The role of ECNs," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 702-720.
    17. Fong, Kingsley Y.L. & Liu, Wai-Man, 2010. "Limit order revisions," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1873-1885, August.
    18. Trauten, Andreas, 2004. "Zur Effizienz von Wertpapieremissionen über Internetplattformen," Working Papers 8, University of Münster, Competence Center Internet Economy and Hybrid Systems, European Research Center for Information Systems (ERCIS).
    19. Liu, Wai-Man, 2009. "Monitoring and limit order submission risks," Journal of Financial Markets, Elsevier, vol. 12(1), pages 107-141, February.
    20. Gomber, Peter & Jäger, Benedikt, 2014. "MiFID: Eine systematische Analyse der Zielerreichung," SAFE White Paper Series 14, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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