Market Microstructure in Emerging and Developed Markets

Answers to Discussion Questions

Chapter 2 Microstructure of Equity Markets

1. The architectural structure of an equity market determines how orders are handled and turned into trades. This matters in a nonfrictionless market because buyers and sellers do not magically meet in a fairy book environment. Important institutional arrangements include involving intermediaries, using computers, and following the rule book for trading that is required for a marketplace to function.

   The accuracy of price discovery in a marketplace depends on its architectural structure. Market architecture also determines how the orders of large, institutional investors are handled to minimize the impact they typically have on market prices. Trading costs (e.g., bid-ask spreads, market impact costs, order handling costs, and inaccurate price discovery) underlie investor trading decisions, market outcomes, and hence market performance. Importantly, these costs depend on the architectural structure of a market.

   A market with a stronger and sounder structure will deliver lower trading costs for participants. This means more participation by them, higher share values, and thus lower costs of capital for listed companies.

2. A public IPO expands companies' access to financial capital. Therefore, encouraging IPOs and exchange listings is a critical step for a company with strong growth potential. In turn, the funds raised fuel the growth of a national economy.

   Funds obtained through an IPO are raised in a primary ...