Market Microstructure

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?

Microstructure Media


An ongoing collection of significant events in market microstructure. I do not include large market moves that occur over the course of the entire trading day. For a list of only stock market crashes, see here.

20160226 - NYSE stops accepting stop-limit, stop-loss, and good-til-cancelled orders

20150824 - Low liquidity in first 5 minutes of trading (DJIA -6.6% or 1,100pts)

20131208 - Limit Up-Limit Down (LULD) Phase 2 implementation

20131025 - IEX accepts orders

20130425 - CBOE shuts down for half the day

20130423 - Flash Crash from hacked Twitter account (DJIA -150pts)

20130408 - Limit Up-Limit Down (LULD) Phase 1 implementation

20130328 - NASDAQ launches Retail Price Improvement Program

20120801 - NYSE launches Retail Liquidity Program and Knight Capital loses $440mm

20110714 - Compliance date for SEC Rule 15c3-5 regarding risk management for direct market access

20100721 - Direct Edge launches EDGA and EDGX exchanges

20100506 - Flash Crash (DJIA -9% or 1,000pts)

20091005 - Clearly Erroneous Execution (CEE) NYSE Rule 128

200811 - BATS converts ECN to BZX exchange

20070820 - Full implementation of Regulation NMS Rules 610 and 611 (all stocks)

20070709 - Implementation of Regulation NMS Rules 610 and 611 (~250 stocks)

20070208 - NYSE completes hybrid market

2005 - BATS accepts orders

20010409 - U.S. Equity Decimalization Complete

20000905 - U.S. Equity Decimalization Begins

1998 - Direct Edge (Attain) accepts orders

19970120 - Archipelago accepts orders

19970120 - Implementation of SEC Display Rule 11Ac1-4

19871019 - Black Monday (DJIA -22.61% or 508pts)

1986 - First after-market crossing system offered by Instinet

1980 - First direct market access offered by Instinet

19710208 - NASDAQ begins taking orders

196912 - Instinet accepts orders

19291024 - Beginning of the Wall Street Crash of 1929 (Heavy volume slows down ticker)