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Research

Market Microstructure

Order flow, liquidity and venue mechanics as subjects for investigation.

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Overview

Market microstructure studies how the mechanics of trading — order books, information asymmetry between participants, and inventory risk for liquidity providers — shape prices at short horizons, beneath the longer-run forces usually studied in asset pricing.

Core questions

  • How does informed order flow move the price of an asset, and by how much per unit of flow?
  • What is the relationship between trade size and the resulting price impact, and does it hold across liquidity regimes?
  • How should an order book absorb a large order without assuming away the queue dynamics that determine execution price?

Mathematical formulation

Kyle's lambda

Kyle (1985) models the price impact of signed order flow Q as linear, with slope λ — the market's inverse-depth parameter. A smaller λ means a deeper, less easily moved market; λ is the foundational measure of price impact that later impact models (square-root, concave) extend.

Methods we use

  • Sequential trade and informed-trading models

    Kyle, A. S. (1985). Continuous auctions and insider trading. Econometrica, 53(6), 1315–1335; and Glosten, L. R., & Milgrom, P. R. (1985). Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. Journal of Financial Economics, 14(1), 71–100.

  • Price impact and liquidity

    Tóth, B., Lempérière, Y., Deremble, C., de Lataillade, J., Kockelkoren, J., & Bouchaud, J.-P. (2011). Anomalous price impact and the critical nature of liquidity in financial markets. Physical Review X, 1(2), 021006; and Bouchaud, J.-P., Bonart, J., Donier, J., & Gould, M. (2018). Trades, Quotes and Prices. Cambridge University Press.

  • Execution and market-making under inventory risk

    Almgren, R., & Chriss, N. (2001). Optimal execution of portfolio transactions. Journal of Risk, 3(2), 5–39; and Avellaneda, M., & Stoikov, S. (2008). High-frequency trading in a limit order book. Quantitative Finance, 8(3), 217–224.

Open problems

  • Does price impact scale as a square-root or a linear function of order size, and does the answer change across liquidity regimes?
  • How should inventory risk be priced when market-making obligations and informed-trading risk act on the same quotes simultaneously?

This page describes the field's established methods, not DaraHoosh's own results, parameters or current use of them.