Discussion Paper Details

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Title: The Microstructure of Stock Markets

Author(s): Bruno Biais, Larry Glosten and Chester S Spatt

Publication Date: March 2002

Keyword(s): bid-ask spread, liquidity, market design, market microstructure and transactions costs

Programme Area(s): Financial Economics

Abstract: We survey the literature analysing the price formation and trading process, and the consequences of market organization for price discovery and welfare. We develop a united perspective on theoretical, empirical and experimental approaches. We discuss the evidence on transaction costs and the price impact of trades and its analyses in terms of adverse selection, inventory costs and market power. We review the extent to which the associated frictions can be mitigated by such features of market design as the degree of transparency, the use of call auctions, the discreteness of the pricing grid and the regulation of competition between liquidity suppliers or exchanges.

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Bibliographic Reference

Biais, B, Glosten, L and Spatt, C. 2002. 'The Microstructure of Stock Markets'. London, Centre for Economic Policy Research.