Making Market Microstructure Matter

Maureen O'Hara is the Robert W. Purcell Professor of Finance at Cornell University. Market microstructure research has provided important insights into the operation and behavior of securities markets and into the intra-day behavior of asset prices. What has not yet been established is how market microstructure affects economic behavior more generally. This article focuses on the quest for the link between microstructure and economic meaning. It looks at several areas where microstructure should matter, and it suggests ways for looking for such a linkage. The article attempts to define what we know and don't know regarding microstructure effects, as well as suggesting a research agenda of what we ought to know.