COM 104 Lecture Notes - Lecture 9: Samuel Garman, Market Microstructure, Market Maker
15 Jun 2018
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Deep Market
What is 'Deep Market'
A deep market is a securities exchange, or place of commerce, where
a large number of shares can be bought and sold without drastically
affecting the price. A deep market might also refer to the buyers and
sellers following a particular issue as well.
Order flow and prices A central prediction of market microstructure
theory is that order flow affects prices. This follows from inventory
models, where market makers temporarily adjust prices in response to
incoming orders (Garman, 1976; Amihud and Mendelson, 1980; Stoll,
1978; Ho and Stoll, 1981). It also follows from information-based
models where some traders have information about future asset value,
so their trades lead to permanent price adjustments (Glosten and
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Document Summary
A deep market is a securities exchange, or place of commerce, where a large number of shares can be bought and sold without drastically affecting the price. A deep market might also refer to the buyers and sellers following a particular issue as well. Order flow and prices a central prediction of market microstructure theory is that order flow affects prices. This follows from inventory models, where market makers temporarily adjust prices in response to incoming orders (garman, 1976; amihud and mendelson, 1980; stoll, It also follows from information-based models where some traders have information about future asset value, so their trades lead to permanent price adjustments (glosten and. Milgrom, 1985; kyle, 1985; easley and o"hara, 1987). The prediction that order flow affects prices is robust to competition among informed traders (holden and subrahmanyam, 1992), endogenous order sizes (back and baruch, 2005), and the consideration of strategic uninformed traders (admati and pfleiderer, 1988; spiegel and.
