The Research On Chinese Market Microstructure

Market Microstructure Theory has experienced a tremendous growth inlast two decades. Market microstructure is the study of the process and outcomes ofexchanging assets under explicit rules. This paper researches the microstructure ofChinese security market, and analysis the influence of specific trading mechanism onsecurity price.First, the author considers how prices are set in the market, and then provides a briefdiscussion of the trading mechanism. The paper also introduces the tradingmechanism in main security markets, such as NYSE, NASDAQ, Tokyo StockExchange, as well as that in Chinese security market.Next, the paper begins the study of microstructure by examining the bid-ask spread.The results indicate that the bid-ask spread in Chinese market can be interpreted astransaction cost and information cost, but not inventory cost, which is different fromother countries. The author believes the reason is that there is no market maker inChina. Furthermore, the paper analysis the composition of the bid-ask spread inChinese security market.Then the paper researches the special price behavior caused by some trading rules.Because of the minimum price variation rule, the price limit rule, the temporarilytrading halting rule, continouous auction method and call auction method, securities'market prices bias against their true values. The author investigates the influences ofthese rules on the trading price, market volatility and other aspects.The relation between price volatility and volume has been the highlight of empiricalstudy for many years. All the researches found a positive correlation between them.The paper gives an explanation to this phenomenon from the view of marketmicrostructure.Another topic in this paper is multi-market trading activity in Chinese security market.At last, the author takes an analysis on how to design the market by using thetechnology and the conclusion from the above research.