Market microstructure

1
Market microstructure

• Bruno Biais
• Toulouse School of Economics
• Rotman Schools Distinguished lecture Series
• Toronto University
• January 2008

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What is market microstructure?

• Study price formation and trading process
• Why not Walrasian perfect market?
• In some cases fine
• But if market imperfections information
  asymmetry, market power
• In that case, market organization matters for
  efficiency of prices allocations
• Like in games extensive form can affect outcome

3
Why should we care?

• Financial market microstructure interesting
  natural laboratory for micro-economists
• Observe rich information about actions (orders),
  game form (market organization), outcomes (trades
  and prices), etc
• Unique opportunity to study price formation
  (central issue in economics)
• Microstructure also matters for policy firms
  efficiency of prices and allocations affect
  market liquidity transactions costs gt affects
  portfolio performance and firm cost of capital gt
  affects savings investment

4
Goal of these lectures

• Learn how markets work in practice how prices
  are set, orders handled, etc
• Important to design relevant models and
  understand where data comes from.
• Learn basic models of price formation and trading
  process.
• Unified model, with same notations assumptions
• Consider in turn different market imperfections
  (information asymmetry, market power) market
  structures.
• Learn about determinants of liquidity
  informativeness also acquire modeling tools