Microstructure Foundations

Abstract

This chapter gives an overview of institutional and theoretical market microstructure foundations. Section 2.1 introduces to the institutional framework of trading on modern financial markets. We discuss different forms of trading, types of traders as well as types of orders. Moreover, we present fundamental types of market structures, most importantly quote-driven markets vs. order-driven markets, and provide insights into common order precedence and pricing rules. In the last section, market structures and trading rules on some selected international exchanges are discussed. This section is understood as an overview of the most important institutional aspects of financial market microstructures and mainly follows Harris (2003).