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?
- ATS Transparency Data - FINRA information on Alternative Trading Systems
- BATS Market Summary - market share statistics
- Decimus Capital Markets
- KOR Group - broker execution data
- MIDAS - microstructure analytics platform used by the SEC
- Modern Markets Initiative - HFT industry group
- Nanex - market data vendor
- Regulation National Market System (Reg NMS)
- SEC Equity Market Structure Advisory Committee
- Tabb Forum - forum for industry opinion articles
- CNBC: Market Microstructure Issues (1 April 2014) / William O’Brien, Brad Katsuyama, and Michael Lewis
- VPRO International: The Wall Street Code (4 November 2013)
- VPRO International: Money and Speed: Inside the Black Box (31 January 2011)
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 https://www.nasdaqtrader.com/content/MarketRegulation/LULD_FAQ.pdf
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) http://www.sifma.org/news/news.aspx?id=2092
20070709 - Implementation of Regulation NMS Rules 610 and 611 (~250 stocks) http://www.sifma.org/news/news.aspx?id=2092
20070208 - NYSE completes hybrid market
2005 - BATS accepts orders
20010409 - U.S. Equity Decimalization Complete https://www.sec.gov/news/testimony/052401tslu.htm
20000905 - U.S. Equity Decimalization Begins https://www.sec.gov/news/testimony/052401tslu.htm
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)