Market microstructure

Market microstructure examines the processes, systems, and rules that facilitate trading in financial markets. The term was coined in 1976 by UC Berkeley professor Mark Garman in reference to the market dynamics and economic forces that influence trades, quotes, and prices. Insights from market microstructure are essential for developing trading algorithms and understanding the behavior of markets and their participants, ranging from retail traders to institutional investors.

This field investigates trading rules and order types that govern how orders are placed, routed, matched, and executed, with a focus on key aspects such as liquidity, volatility, the bid-ask spread, and price discovery. It covers various asset classes, such as equities, futures, options, and foreign exchange, and explores how these instruments are traded across different venues like exchanges and over-the-counter (OTC) markets.

Market microstructure also looks at electronic trading infrastructure and its technologies—including data feeds, communication protocols, matching algorithms, and latency—which impact transaction speed, cost, and market efficiency. Additionally, it assesses fee structures to help market participants optimize strategies and manage costs.