Why Market Microstructure Matters in High-Frequency Trading

Market microstructure deals with the trading of financial assets and the evolution of asset prices by taking into account of transaction costs, incomplete information, and heterogeneous expectations. The study of market microstructure requires transaction level data (intraday) that allows examination of short- run price behavior that can lead to systematic mispricing in the long-term. It allows assessment of the impact of trading mechanisms, for example, tick rules, trading halts, and upper and lower price bounds, on market quality, which means transparency and accurate price discovery.
As explained by the Capital Market and Market Microstructure Research Forum, intraday data, once highly guarded by exchanges, has become more readily available to the public over the years. Apparently, it is not the ever growing power of the desktop PC to process large scale datasets alone that has driven a growing body of research utilizing ultra-high frequency data. Rather, it is the need for regulators to evaluate market mechanics that best respond to investors requirements and the need for academics to better understand the relationships among market participants, trading costs, and trading process in their quest for an alternative asset pricing paradigm.
For those interested in the subject, High-Frequency Trading Experts Workshop 2010 DVD Video Package, “Practical Implementation of High-Frequency Trading Strategies”, led by Peter van Kleef, Chief Executive Officer of Lakeview Arbitrage, features the session “Exploiting Market Microstructure with High-Frequency Trading”.

High-Frequency Trading Experts Workshop 2010 DVD Video Package

High-Frequency Trading Experts Workshop 2010 DVD Video Package

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