Microstructure refers to price formation, price discovery, transaction and timing cost, information disclosure, and the associated behavior of rational participants in financial markets. It is a field of study that focuses on how market design affects the efficiency and liquidity of financial markets.The efficient-market hypothesis (EMH) states that asset prices reflect all available information. This means that prices are always at or near their true value – there are no “missed” opportunities for profit. The EMH is widely accepted by academics but has been challenged by some practitioners who argue that certain market conditions do allow for profitable trading strategies.Transaction costs refer to the costs incurred when buying or selling an asset. These costs can include commissions, slippage, and bid-ask spreads. Timing costs are the opportunity cost of not being able to trade immediately – they arise because trades take time to execute and settle. Information asymmetry occurs when one party in a transaction has more information than another party – this can lead to problems with adverse selection (e.g., moral hazard).
