While I was at NASD Economic Research, one of the primary responsibilities of our group
was to conduct market microstructure research -- the analysis of the basic functioning of the
market, generally to determine or predict the effect of changes on the marketplace. Examples
of such changes include implementation of exchange rules or policies, changes in the
composition and behavior of market participants, and alterations in market-related
conditions (e.g., economic factors, etc.). Variables of interest include measures of
"market quality," such as bid-ask spread (representative of the cost of retail
trades), market depth, and liquidity, among many others. Typically, microstructure research
requires massive amounts of data, including audit trail databases of trades and quotation
updates, which frequently constitute over a million observations per trading day.
At present, I'm interested in three research topics along these lines, which
are briefly discussed below.
- Additional study of the effect of order flow
"preferencing" -- essentially the absence of market-wide secondary priority -- on
trading costs to investors. Bob Jennings (Indiana), Robert Battalio (Georgia
State), and I have written two papers that empirically illustrate that preferencing
is associated with reduced trading costs and is a natural consequence of the
ability of dealers to differentiate informed and uninformed order flow, respectively.
- Research on market impact, specifically for large institutional orders, as
determined by market structure. Is capital commitment greater in traditional
dealer markets? To what extent can innovative alternative trading systems -- such as
electronic trading systems, or "ECNs" -- reduce costs?
- Design of effective opening processes for marketplaces. Currently, the opening processes
used by financial markets are flawed -- the discontinuities induced by
periods of market closure are increasingly severe in a global marketplace in which
information costs continue to fall. Accordingly, "gapping" at the open -- possibly
exacerbated by intermediaries -- translates to risks and costs that must be borne
by investors. Barring 24-hour trading, opening processes should be designed to
minimize the cost component.
I've co-authored the following papers (available in Adobe Acrobat):
- Case study
- Data paper
Useful Research Links
[ Journal of Business /
Journal of Finance /
Journal of Financial and Quantitative Analysis /
Journal of Financial Economics /
Journal of Financial Intermediation /
Journal of Financial Markets /
Review of Financial Studies ]