Market Microstructure Theory

by Maureen O'Hara

Note

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Overview

Published by Blackwell Publishers, this academic text by Maureen O'Hara (Cornell University) is the definitive textbook on market microstructure theory. Market microstructure is the study of the process and outcomes of exchanging assets under specific trading rules.

Key Topics

Based on publicly available information, the book covers:

• Inventory Models: How market makers set prices to manage inventory risk (Garman, Stoll, Ho-Stoll models).
• Information-Based Models: How informed and uninformed traders interact, and how prices incorporate private information (Kyle, Glosten-Milgrom models).
• Strategic Trader Models: How large traders optimally split orders and time their executions.
• Market Design: How trading rules, mechanisms (auctions, dealer markets, electronic limit order books), and regulations affect price discovery and market quality.
• Empirical Microstructure: Measurement of spreads, price impact, information content of trades, and market quality metrics.

Relevance

Essential reading for algorithmic traders, quantitative researchers, and anyone seeking to understand the mechanics of how financial markets actually function at the transaction level.