Chapter 2
Introduction to Market Microstructure
Chandrasekhar Krishnamurti
2.1 Chapter Introduction and Objectives
A stock exchange or bourse is a corporation or a mutual organization that provides
trading facilities for traders to trade stocks and other securities. The top 12
exchanges have a combined market capitalization running to trillions of dollars.
Obviously, investors, corporations, and academics are interested in the design and
the functioning of stock markets. In this chapter, we provide an overview of type
and design of markets, and price formation and price discovery.
This chapter has the following objectives:
• Define market microstructure
• Discuss market structure and design issues
• Highlight how some of the top exchanges like the New York Stock Exchange
(NYSE), NASDAQ, Tokyo Stock Exchange, and London Stock Exchange
operate
2.2 What is Market Microstructure?
A common definition of market microstructure is “It is the study of the trading
mechanisms used for financial securities.” Professor Maureen O’Hara of Cornell
University, an authority on market microstructure, describes market microstructure
as “the study of the process and outcomes of exchanging assets under a specific set
of rules.”
C. Krishnamurti
AUT University College of Business, WF Building, Wellesley Campus, 42 Wakefield Street,
Auckland 1010, New Zealand
e-mail: Chandrasekhar.krishnamurti@aut.ac.nz
S.R. Vishwanath, C. Krishnamurti (eds.), Investment Management: A Modern Guide 13
to Security Analysis and Stock Selection, DOI: 10.1007/978-3-540-88802-4 2,
c 2009 Springer-Verlag Berlin Heidelberg
Introduction to Market Microstructure
Chandrasekhar Krishnamurti
2.1 Chapter Introduction and Objectives
A stock exchange or bourse is a corporation or a mutual organization that provides
trading facilities for traders to trade stocks and other securities. The top 12
exchanges have a combined market capitalization running to trillions of dollars.
Obviously, investors, corporations, and academics are interested in the design and
the functioning of stock markets. In this chapter, we provide an overview of type
and design of markets, and price formation and price discovery.
This chapter has the following objectives:
• Define market microstructure
• Discuss market structure and design issues
• Highlight how some of the top exchanges like the New York Stock Exchange
(NYSE), NASDAQ, Tokyo Stock Exchange, and London Stock Exchange
operate
2.2 What is Market Microstructure?
A common definition of market microstructure is “It is the study of the trading
mechanisms used for financial securities.” Professor Maureen O’Hara of Cornell
University, an authority on market microstructure, describes market microstructure
as “the study of the process and outcomes of exchanging assets under a specific set
of rules.”
C. Krishnamurti
AUT University College of Business, WF Building, Wellesley Campus, 42 Wakefield Street,
Auckland 1010, New Zealand
e-mail: Chandrasekhar.krishnamurti@aut.ac.nz
S.R. Vishwanath, C. Krishnamurti (eds.), Investment Management: A Modern Guide 13
to Security Analysis and Stock Selection, DOI: 10.1007/978-3-540-88802-4 2,
c 2009 Springer-Verlag Berlin Heidelberg
