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What is market microstructure?

Market microstructure

Market microstructure, as defined by the National Bureau of Economic Research (NBER) is a branch of finance concerned with theoretical, empirical and experimental research on the economics of security markets. Issues addressed by the study include price formation, price discovery and investment behaviour.

Where have you heard about market microstructure?

Any time you've come across a study attempting to explain how prices are formed in an economy would be considered an example of market microstructure. In 2015, the Huffington Post described the study to be 'the new frontier for long-term portfolio optimisation'.

What you need to know about market microstructure.

The main aim of market microstructure is to provide better liquidity in the markets and reduce volatility. As a result, the concept has developed a range of different studies aiming to identify the impact of market microstructure on unethical incidents such as insider trading, market manipulation and broker-client conflict. Primarily though, the study's main aims is to examine the way market processes affect determinants of transaction prices, quotes and costs, as well as trading volume and behaviour.

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