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The Science of Algorithmic Trading and Portfolio Management by Robert Kissell

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Chapter 2

Market Microstructure

This chapter provides an overview of market microstructure research. Market microstructure research focuses on how, when, where, and why financial instruments transact in the marketplace. We trace the evolution of the equity markets from stocks trading on the floor of the NYSE exchange via specialists (for listed stocks) and via NASDAQ market makers (for OTC stocks) to a current environment where stocks trade on numerous exchanges, and with only limited intervention from specialists and market makers, and where buyers and sellers are matched via electronic trading algorithms. We evaluate the pros and cons of this new environment and investigate what it means to traders now executing orders via algorithms. We investigate ...

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