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Market Microstructure in Emerging and Developed Markets

Book Description

A comprehensive guide to the dynamic area of finance known as market microstructure

Interest in market microstructure has grown dramatically in recent years due largely in part to the rapid transformation of the financial market environment by technology, regulation, and globalization. Looking at market transactions at the most granular level—and taking into account market structure, price discovery, information flows, transaction costs, and the trading process—market microstructure also forms the basis of high-frequency trading strategies that can help professional investors generate profits and/or execute optimal transactions.

Part of the Robert W. Kolb Series in Finance, Market Microstructure skillfully puts this discipline in perspective and examines how the working processes of markets impact transaction costs, prices, quotes, volume, and trading behavior. Along the way, it offers valuable insights on how specific features of the trading process like the existence of intermediaries or the environment in which trading takes place affect the price formation process.

  • Explore issues including market structure and design, transaction costs, information flows, and disclosure

  • Addresses market microstructure in emerging markets

  • Covers the legal and regulatory issues impacting this area of finance

  • Contains contributions from both experienced financial professionals and respected academics in this field

If you're looking to gain a firm understanding of market microstructure, this book is the best place to start.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Contents
  5. Acknowledgments
  6. Part I: Introduction to Market Microstructure
    1. Chapter 1: Market Microstructure
      1. INTRODUCTION
      2. ORGANIZATION OF THE BOOK
      3. SUMMARY AND CONCLUSIONS
      4. REFERENCES
      5. ABOUT THE AUTHORS
    2. Chapter 2: Microstructure of Equity Markets
      1. INTRODUCTION
      2. A LOOK AT THE FRICTIONLESS MARKETPLACE
      3. EQUITY MARKET MICROSTRUCTURE: ANALYSIS OF A NONFRICTIONLESS WORLD
      4. A WHIRLWIND TOUR OF THE MICROSTRUCTURE LITERATURE
      5. INTRADAY PRICE VOLATILITY: A MEASURE OF MARKET QUALITY
      6. RAISING CAPITAL THROUGH MARKETS
      7. SUMMARY AND CONCLUSIONS
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHORS
    3. Chapter 3: Microstructure of the Euro-Area Government Bond Market
      1. INTRODUCTION
      2. THE MTS MARKET
      3. BOND MARKET LIQUIDITY
      4. DETERMINANTS OF LIQUIDITY
      5. PRECRISIS AND CRISIS PERIODS
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHORS
    4. Chapter 4: Microstructure Developments in Derivative Markets
      1. INTRODUCTION
      2. ROOTS OF MICROSTRUCTURE THEORY
      3. EVIDENCE FROM A TÂTONNEMENT AUCTION MARKET
      4. LIQUIDITY PROVISION IN DOUBLE-AUCTION MARKET SETTINGS
      5. INFORMATION FLOWS BETWEEN OPEN-OUTCRY AND ELECTRONIC MARKETS
      6. OTHER MICROSTRUCTURAL ISSUES
      7. FUTURE MICROSTRUCTURE RESEARCH
      8. SUMMARY AND CONCLUSIONS
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHOR
    5. Chapter 5: The Microstructure of Currency Markets
      1. INTRODUCTION
      2. CHARACTERISTICS OF THE CURRENCY MARKET
      3. ORDER FLOW AND EXCHANGE RATES
      4. BID-ASK SPREADS
      5. PRICE DISCOVERY
      6. VOLATILITY
      7. SUMMARY AND CONCLUSIONS
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHORS
    6. Chapter 6: The Architecture of Securities Market Supervision before and after the Crisis
      1. INTRODUCTION
      2. THE SUPERVISORY ARCHITECTURE BEFORE THE CRISIS
      3. THE INTEGRATION OF SECURITIES SUPERVISION
      4. IS THE INTEGRATION PROCESS STILL VALID?
      5. SUMMARY AND CONCLUSIONS
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
    7. Chapter 7: Financial Market Contagion
      1. INTRODUCTION
      2. WHAT CAUSES CONTAGION?
      3. EMPIRICAL MODELS FOR TESTING CONTAGION
      4. HISTORY OF EMERGING MARKET CONTAGIONS
      5. HISTORY OF DEVELOPED MARKET CONTAGIONS
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHOR
  7. Part II: Market Architecture and Design
    1. Chapter 8: Market Architecture
      1. INTRODUCTION
      2. TYPE OF MARKET STRUCTURES
      3. LIQUIDITY SEARCH AND BLOCK TRADES
      4. ANONYMITY AND MARKET TRANSPARENCY
      5. CENTRALIZATION VERSUS FRAGMENTATION
      6. DARK POOLS AND ALTERNATIVE TRADING SYSTEMS
      7. INVENTORY MODELS
      8. HIGH-FREQUENCY TRADING
      9. SUMMARY AND CONCLUSIONS
      10. DISCUSSION QUESTIONS
      11. REFERENCES
      12. ABOUT THE AUTHOR
    2. Chapter 9: Designing a Trading Market
      1. INTRODUCTION
      2. MARKET PARTICIPANTS
      3. THE TRADE PROCESS
      4. TRADING MECHANISM
      5. DESIGNING THE TRADING PROCESS
      6. HIGH-FREQUENCY TRADING
      7. TRADING ALGORITHMS
      8. SUMMARY AND CONCLUSIONS
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHOR
    3. Chapter 10: Current Issues in Market Design
      1. INTRODUCTION
      2. COMPETITION AND FRAGMENTATION
      3. HIGH-FREQUENCY TRADING
      4. DARK POOLS
      5. SUMMARY AND CONCLUSIONS
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHOR
      9. ACKNOWLEDGMENTS
    4. Chapter 11: Decimalization and Discreteness
      1. INTRODUCTION
      2. THEORY BEHIND MINIMUM PRICE INCREMENTS
      3. EMPIRICAL EVIDENCE: MINIMUM PRICE CHANGE FROM ONE-EIGHTH TO ONE-SIXTEENTH
      4. EMPIRICAL EVIDENCE: MINIMUM PRICE CHANGE FROM ONE-SIXTEENTH TO DECIMALS
      5. DISCRETE PRICING IN NON-U.S. MARKETS
      6. TICK SIZE CHANGES IN NONEQUITY MARKETS
      7. CLUSTERING
      8. SUMMARY AND CONCLUSIONS
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHORS
    5. Chapter 12: Dark Trading
      1. INTRODUCTION
      2. WHAT ARE DARK POOLS?
      3. THEORETICAL AND EMPIRICAL LITERATURE ON DARK POOLS
      4. REGULATORY CONCERNS
      5. SUMMARY AND CONCLUSIONS
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
      9. ACKNOWLEDGMENTS
  8. Part III: Price Formation and Price Discovery
    1. Chapter 13: Determinants of Trading Costs
      1. INTRODUCTION
      2. TRADING COSTS COMPONENTS
      3. TRADING COST MEASUREMENT
      4. MAGNITUDE OF TRADING COSTS: LITERATURE REVIEW
      5. THE DETERMINANTS OF TRADING COSTS
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHOR
    2. Chapter 14: Market Makers and Liquidity
      1. INTRODUCTION
      2. CONSIDERATIONS FACING MARKET MAKERS
      3. FORMS OF MARKET MAKERS THROUGH HISTORY
      4. FIXED INCOME
      5. SUMMARY AND CONCLUSIONS
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHOR
    3. Chapter 15: Liquidity beyond the Inside Spread
      1. INTRODUCTION
      2. THE INSTITUTIONAL TRADING PARADIGM
      3. TRADING PROCESS
      4. MEASUREMENT OF PRICE IMPACT
      5. PRICE IMPACT IN EMERGING MARKETS
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHOR
    4. Chapter 16: Price Discovery in International and Emerging Asset Markets
      1. INTRODUCTION
      2. MEASURING PRICE DISCOVERY
      3. MARKET STRUCTURE AND PRICE DISCOVERY
      4. PRICE DISCOVERY IN SPECIFIC ASSET MARKETS
      5. SUMMARY AND CONCLUSIONS
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
    5. Chapter 17: Holding Back Volatility
      1. INTRODUCTION
      2. BASIC TERMINOLOGY
      3. PROS AND CONS OF CIRCUIT BREAKERS
      4. THEORETICAL BACKGROUND
      5. EMPIRICAL EVIDENCE
      6. WHAT IS IN THE FUTURE AGENDA?
      7. SUMMARY AND CONCLUSIONS
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHORS
  9. Part IV: Transaction Costs, Timing Costs, and Information Disclosure
    1. Chapter 18: Bid-Ask Spreads, Commissions, and Other Costs
      1. INTRODUCTION
      2. WHY DOES THE BID-ASK SPREAD EXIST?
      3. MEASURES OF BID-ASK SPREAD AND OTHER TRADING COSTS
      4. MARKET STRUCTURE AND TRADING COSTS
      5. HIGH-FREQUENCY TRADING AND DIRECTIONS OF FUTURE RESEARCH
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHOR
      10. ACKNOWLEDGMENTS
    2. Chapter 19: Pretrade and Posttrade Transparency
      1. INTRODUCTION
      2. MARKET TRANSPARENCY
      3. BACKGROUND ON LIMIT ORDER MARKETS
      4. TYPES OF ORDERS
      5. DOES PRETRADE TRANSPARENCY MATTER?
      6. IMPACT OF MARKET CHARACTERISTICS ON TRADERS' BEHAVIOR
      7. POSTTRADE TRANSPARENCY
      8. SUMMARY AND CONCLUSIONS
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHORS
    3. Chapter 20: Empirical and Experimental Research on Transparency and Disclosure
      1. INTRODUCTION
      2. PRETRADE TRANSPARENCY
      3. ICEBERG ORDERS AND HIDDEN LIQUIDITY
      4. PRETRADE ANONYMITY
      5. PRETRADE ANNOUNCEMENTS
      6. POSTTRADE DISCLOSURE
      7. POSTTRADE ANONYMITY
      8. SUMMARY AND CONCLUSIONS
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHOR
  10. Part V: Microstructure Issues in Emerging Markets
    1. Chapter 21: Stock Market Efficiency and Market Microstructure in Emerging Markets
      1. INTRODUCTION
      2. DEFINING MARKET EFFICIENCY
      3. TESTS OF MARKET EFFICIENCY
      4. MARKET MICROSTRUCTURE OF EMERGING CAPITAL MARKETS
      5. FINANCIAL MARKET INDEXES
      6. EMPIRICAL ANALYSIS OF MARKET EFFICIENCY IN EMERGING MARKETS
      7. SUMMARY AND CONCLUSIONS
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHOR
    2. Chapter 22: Liquidity and Crises in Asian Equity Markets
      1. INTRODUCTION
      2. DATA AND LIQUIDITY MEASURES
      3. STOCK LIQUIDITY IN ASIAN MARKETS
      4. FINANCIAL CRISIS
      5. RELATIONSHIP BETWEEN FINANCIAL CRISIS AND STOCK LIQUIDITY
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHORS
    3. Chapter 23: Trading Costs and Execution Strategies in Emerging Markets
      1. INTRODUCTION
      2. TRANSACTION COST ANALYSIS
      3. RATIONALE FOR HIGHER TRANSACTION COSTS AND ILLIQUIDITY
      4. EXECUTION STRATEGIES TO MINIMIZE TRANSACTION COSTS IN EMERGING MARKETS
      5. INCORPORATING TRANSACTION COST ANALYSIS INTO PORTFOLIO OPTIMIZATION
      6. OTHER TRANSACTION COST STRATEGIES AND ISSUES
      7. SUMMARY AND CONCLUSIONS
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHORS
    4. Chapter 24: Intraday Price Behavior during Information Arrival in Emerging Markets
      1. INTRODUCTION
      2. ARRIVAL OF NEWS AND PRICE JUMP OCCURRENCE
      3. DATA, NEWS, AND SURPRISES
      4. PRICE JUMPS AS AN INTEGRAL PART OF PRICE FORMATION
      5. EFFECT OF FOREIGN NEWS AND FOREIGN JUMPS ON CEE EMERGING MARKETS
      6. SUMMARY AND CONCLUSIONS
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHORS
      10. ACKNOWLEDGMENTS
    5. Chapter 25: Market Microstructure in African Equity Markets
      1. INTRODUCTION
      2. KEY MICROSTRUCTURE ISSUES
      3. MARKET EFFICIENCY
      4. SUMMARY AND CONCLUSIONS
      5. DISCUSSION QUESTIONS
      6. REFERENCES
      7. ABOUT THE AUTHORS
      8. ACKNOWLEDGMENTS
  11. Answers to Discussion Questions
  12. Index