Market microstructure for Quants
The Chapter Market Microstructure Knowledge Needed for Controlling an Intra-Day Trading Process of the Handbook on Systemic Risk states:
The market micro-structure of an asset class is a mix of the market design, the trading behaviours of trading agents, the regulatory environment, and the availability of correlated instruments (like Equity Traded Funds, Futures or any kind of derivative products). Formally, the micro-structure of a market can be seen as several sequences of auction mechanisms taking place in parallel, each of them having its specificity.
To optimise his behaviour, a trader has to choose an abstract description of the micro-structure of the markets he will interact with: this will be his model of market micro-structure. It can be a statistical macroscopic one like in the widely used Almgren-Chriss framework, in which the time is sliced in 5 or 10 minutes long time intervals during which the interactions with the market are aggregated in two statistical phenomena: the market impact as a function of the ``participation rate'' of the trader and the volatility as a proxy of the market risk. It can also be a microscopic description of the order-book behaviour like in:
- Simulating and analyzing order book data: The queue-reactive model where the way the first queue evolve with respect to the size of others (best opposite and second or third queues) are studied.
- a theoretical one explaining how stabilizing behaviours can emerge: Efficiency of the Price Formation Process in Presence of High Frequency Participants: a Mean Field Game analysis
- a PDE (Fokker-Planck) version of the order flows (with an intraday seasonality correction) A Fokker-Planck description for the queue dynamics of large tick stocks
- another one focused on direct analysis of the link between the state of the orderbook and the next event (midprice change or trade) Trade arrival dynamics and quote imbalance in a limit order book
- an economic view of agent behaviour (in a theoretic model) A Dynamic Model of the Limit Order Book.
Sources of information
Conference proceedings and web sites
There is a large overview of state of the art in microstructure in the talks of the conf held every two years (2010 and 2012 up to now, 2014 is planned) in Dec in Paris Market microstructure: confronting many viewpoints.
Another recent book: Market Microstructure in Practice, describes why microstructure is important for trading, from a quantitative viewpoint.
A book on the 2010 eponym conference is available: Market microstructure: confronting many viewpoints (the book)