8. Market Architecture: A Conceptual Framework and Real-World Systems

  1. H. Kent Baker and
  2. Halil Kiymaz
  1. Massimiliano Marzo

Published Online: 23 AUG 2013

DOI: 10.1002/9781118681145.ch8

Market Microstructure in Emerging and Developed Markets: Price Discovery, Information Flows, and Transaction Costs

Market Microstructure in Emerging and Developed Markets: Price Discovery, Information Flows, and Transaction Costs

How to Cite

Marzo, M. (2013) Market Architecture: A Conceptual Framework and Real-World Systems, in Market Microstructure in Emerging and Developed Markets: Price Discovery, Information Flows, and Transaction Costs (eds H. K. Baker and H. Kiymaz), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118681145.ch8

Author Information

  1. Associate Professor of Economics, University of Bologna

Publication History

  1. Published Online: 23 AUG 2013
  2. Published Print: 16 AUG 2013

ISBN Information

Print ISBN: 9781118278444

Online ISBN: 9781118681145

SEARCH

Keywords:

  • concentration;
  • fragmentation;
  • dark pools;
  • inventory risk;
  • high-frequency trading.

Summary

This chapter examines the logic behind evolving market architecture in financial markets. It starts by discussing the various types of market structure and the main driver of market architecture: the search for liquidity by dealers and brokers. The chapter shows how the design of market architecture is a result of both the search for liquidity and the need to minimize inventory risk incurred by dealers. A brief description of inventory models is provided. The chapter then presents a discussion about market fragmentation versus concentration with the analysis about anonymity versus open limit order with special reference to the more recent advances in the theoretical and empirical literature. A section focuses on nonconventional or alternative exchange venues such as dark pools, with specific execution methods including electronic communication networks (ECNs) and smart order routing mechanisms, with special reference to their mechanics and evolution. The chapter ends by analyzing the prospective impact of high-frequency trading on market architecture. The discussion is oriented by the practical experience adopted in major stock exchanges and execution venues around the world.