"Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications"
©
Journal of Financial Markets,
May
2005
Volume: 8
|
Issue: 2
|
Pages: 217-64
Publication type: Journal article
Research Archive Topic: Business Economics and Public Policy, Capital Markets and Investments, Corporate Finance
Abstract
We survey the literature analyzing the price formation and trading process, and the consequences of market organization for price discovery and welfare. We offer a synthesis of the theoretical microfoundations and empirical approaches. Within this framework, we confront adverse selection, inventory costs and market power theories to the evidence on transactions costs and price impact. Building on these results, we proceed to an equilibrium analysis of policy issues. We review the extent to which market frictions can be mitigated by such features of market design as the degree of transparency, the use of call auctions, the pricing grid, and the regulation of competition between liquidity suppliers or exchanges.
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