Open Questions in Market Microstructure Across Trading Roles
Summary
The document surveys open research questions in market microstructure, organizing them by the role of exchanges, asset managers, traders, and market makers. For exchanges, it highlights how fee schedules might attract liquidity and how auction design might improve price formation while limiting noise. For asset managers, it asks whether crowding and trading costs can erode the anomalies that motivate investment strategies, and how to reconcile high-frequency impact models with the impact of large parent orders.
For traders and market makers, it points to the challenge of combining predictive signals with execution decisions when trading itself moves prices and that impact decays. It also identifies cross-impact as a problem when executing baskets or making markets across multiple instruments. The response names papers and a book as starting points, but does not present methods, results, or settled answers. These are framed as active modeling and empirical challenges, so the list serves as a research map rather than a complete or current inventory of the field.
Key ideas
- Exchange fee schedules influence incentives to supply liquidity and attract market makers.
- Auction duration and design affect how information and noise enter price formation.
- Crowding and trading costs may reduce the profitability of asset pricing anomalies.
- Reconciling price impact at high frequency with the impact of large orders remains difficult.
- Optimal execution with signals and cross-impact across instruments are open modeling problems.
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Full text
# What are some currently open problems in market microstructure # What are some currently open problems in market microstructure I've been reading up on market microstructure models and toyed around with them -- i.e., I got simulations for Roll (1984), Glosten-Milgrom (1985), Kyle (1985), Kyle (1985) with multiple periods. I am wondering, though, what are some current problems in the field? ## Answer by lehalle (score 10, accepted) https://quant.stackexchange.com/a/60166 They are a lot of open problems in market microstructure. To have an idea of the whole landscape, have a look at Market Microstructure in Practice, 2nd Edition, by L and Laruelle. I would split them in - From the viewpoint of exchanges - Optimal fee schedules to "attract" liquidity (and hence efficient market makers), have a look at Optimal make-take fees for market making regulation, by El Euch, Mastrolia, Rosenbaum and Touzi. - Best auction system to have more informed trading and less noise contributing to the price formation Optimal Auction Duration: A Price Formation Viewpoint, by Jusselin, Mastrolia and Rosenbaum. - From the perspective of asset managers - Trading costs of investment strategies: is there a "saturation" effect coming from crowding, contibuting to killing an "anomaly" one invest on, have a look at Stock Market Liquidity and the Trading Costs of Asset Pricing Anomalies, by Briere, L, Tamara Nefedova and Raboun. - there is a remaining puzzle on market impact: how to reconciliate high frequency price impact models and market impact of metaorders, a typical reference is Market impacts and the life cycle of investors orders, by Bacry, Iuga, Lasnier, and L. - From the perspective of traders and market makers - Optimal trading with signals and price impact decay, the way a high frequency signal and your actual trading mix is difficult to model, and hence the optimal way to split your intensions to take a maximal profit of your information is not known. Have a look at Incorporating Signals into Optimal Trading, by L and Neuman for a tentative modeling. - Optimizing cross-impact: when you have to execute a basket of orders (or if you make the market on more than one tradable instrument), how to intricate your actions optimally. Two references: Dissecting cross-impact on stock markets: An empirical analysis, by Benzaquen, Mastromatteo, and Bouchaud A Mean Field Game of Portfolio Trading and Its Consequences on Perceived Correlations, by L and Mouzouni.
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