Market Microstructure Theory

Market Microstructure Theory studies how trading mechanisms affect price formation and liquidity in financial markets. It examines the rules and processes that govern the buying and selling of assets, considering factors like order types, market participants, and information flow. This theory helps explain how prices are determined, the impact of trading volume on market efficiency, and the behavior of traders. By understanding these dynamics, investors can make better-informed decisions and anticipate how different market conditions may affect their trades.