Editor's Introduction to the Special Issue on Market Microstructure
Journal of Portfolio Management
M arket structure is the set of rules that govern order handling, trading, and price determination. Market microstructure, a relatively new field in financial economics, addresses issues regarding how orders are integrated together and turned into trades and transaction prices, and it involves the study, design, and regulation of trading mechanisms. Accordingly, market structure and market microstructure have much in common. In the 12 articles in this special issue on market structure we deal
... th various topics of interest to asset managers and regulators. When microstructure analysis emerged in the second half of the 20th century, only a handful of people were working in the yet unnamed field. One of us, Schwartz, was part of that small group, and we were concerned that the field would run out of topics to deal with. We were wrong. Microstructure has attracted a substantial amount of academic research and, today, virtually half a century later, the field has remained robust. How come? The security markets are very complicated, the devil is in the details, technology and regulatory change have been transformative, institutional investing has moved to center stage, and a good deal remains that practitioners, regulators, and academicians do not yet understand. Following the 1975 Securities Acts Amendments which mandated the development of a National Market System, there has been a robust growth of institutional investing. The impact of technological change has been transformative. In the first article in this special issue, Robert A. Schwartz, James Ross, and Deniz Ozenbas in their article "Equity Market Structure and the Persistence of Unsolved Problems: A Microstructure Perspective" first present a brief historical perspective on the evolution of equity market structure and then consider implications microstructure analysis has had for improving market structure. The authors describe the structural issues that plague U.S. equity market structure every day, issues that are not caused by external forces like regime change or climate change. Instead, these issues are wholly internal to the design and operations of the equity markets' systems. Although they may not be dramatic enough to trigger stock market circuit breakers or regulatory intervention, the costs to investors, issuers and a healthy, vibrant free market economy are chronic, persistent, and substantial. Despite the improvements in the equity markets, market impact costs and price discovery noise continue to accentuate short period returns variance. The authors present empirical evidence of how sizable that accentuation The Journal of Portfolio Management | 1 It is illegal to make unauthorized copies, forward to an unauthorized user, post electronically, or store on shared cloud or hard drive without Publisher permission.