Many of the issues in market microstructure are difficult to address due to the cost and availability of large data sets. Even special academic pricing is usually too expensive for all but the most prominent universities. For these reasons, prior literature is sparse, has small samples, or is not conducted in an unbiased manner. I encourage anyone with access to relevant data to make it available to researchers so policy makers can make data-driven decisions that will improve the quality of markets.
Issues in Microstructure
Order Type Controversy – Do some exchange or ATS clients have access to order types that other clients do not? Is the reason due to client favoritism or technical sophistication?
Payment for Order Flow – Does the fee that brokers receive for routing certain orders adversely affect investors and/or markets? Does internalization allow for legal front-running or simply screening for informed trades? Should a “trade-at” rule be implemented which would prohibit execution unless the broker was ready to trade at that price with an order from a public exchange?
Consolidated Audit Trail – How should exchanges manage data to ensure that market participants would be capable of “replaying” a market event to find errors or misbehavior? How do we capture the difference between direct feeds and the National Best Bid and Offer (NBBO)?
Market Complexity – How should exchanges route orders to achieve best price and fast execution? Should Rules 610 and 611 force exchanges to stop trading when there is an opportunity to get better prices on another exchange? How does order routing by the exchange affect trading behavior with broker order routing and the maker-taker model of liquidity rebates?
Speed – Should the speed of market access be limited or equalized? If a faster trader can deliver shares to a slower trader, is this front-running or market making? How should we measure price improvement in this case? What impact does this have on markets?
Liquidity – Is the liquidity provided by high frequency trading harmful if it disappears during times of market stress? At what time horizon should liquidity be focused? Price impact will occur on any size trade executed on a short enough time horizon. Should a “trade-at” rule be implemented to incentivize more visible liquidity?
Flash Crashes – Why do flash crashes occur? How do we limit the frequency and severity of flash crashes? Do flash crashes matter to market participants that do not trade intraday?
- ATS Transparency Data – FINRA information on Alternative Trading Systems
- BATS Market Summary – market share statistics
- Decimus Capital Markets
- KOR Group – broker execution data
- MIDAS – microstructure analytics platform used by the SEC
- Modern Markets Initiative – HFT industry group
- Nanex – market data vendor
- Regulation National Market System (Reg NMS)
- SEC Equity Market Structure Advisory Committee
- Tabb Forum – forum for industry opinion articles
- Timeline – A timeline of significant events in U.S. equity markets