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Handbook of the Economics of Finance by Rene M. Stulz, M. Harris, George M. Constantinides

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Chapter 9

Market Microstructure

Hans R. Stoll    Owen Graduate School of Management, Vanderbilt University

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, ...

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