In this paper I review some of the recent advancements in the understanding of the market microstructure of financial markets and of the role of heterogenous investors in explaining the statistical regularities observed in market data. After introducing some of the main problems in microstructure and describing the most common structure of financial markets, the Limit Order Book (LOB), I will focus on the interplay between order flow, describing the intention of the agents, and the price dynamics, describing the outcome of their interactions. I will show that the quantity embedding this subtle interaction, termed market impact, is determined by the large heterogeneity in size of the investors in the financial market. I will also show the relevance of this problem for investors, by introducing the problem of optimal execution and describing the empirical evidences on the associated cost, focusing also on the role of herding behavior. Finally, I will describe some evidences of the role of heterogeneity of time scales in determining some properties of LOB.
IOS Press, Inc.
6751 Tepper Drive
Clifton, VA 20124
Tel.: +1 703 830 6300
Fax: +1 703 830 2300 firstname.lastname@example.org
(Corporate matters and books only) IOS Press c/o Accucoms US, Inc.
For North America Sales and Customer Service
West Point Commons
Lansdale PA 19446
Tel.: +1 866 855 8967
Fax: +1 215 660 5042 email@example.com