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By Jack D. Glen

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Additional info for An Introduction to the Microstructure of Emerging Markets (Discussion Paper (International Finance Corporation))

Example text

Also importantly, especially in the newer automated systems, microstructure dictates the manner in which incoming orders to buy and sell are matched, which determines, to some extent at least, the price at which trades occur. The importance of microstructure arises from the role it plays in each of four fundamental market attributes: liquidity, efficiency, trading costs and volatility. Though closely related, each of these attributes is different and can be influenced by microstructure, the regulatory regime under which the market operates, as well as by the economic fundamentals which drive security prices.

The BMF, BMV and BOVESPA markets, on the other hand, are fundamentally continuous open-outcry auctions, with traders announcing their orders on the floor, but in each of these three markets there is also an order book available for market orders, even if that order book is not the principal route for orders to take. In several of these markets, however, certain traders do specialize in selected securities which, informally, provides some of the benefits of a market-maker: liquidity and information gathering.

Also available is a complete list of the current day's trading activity, including price, time, quantity buyer/seller, delivery date and total value of each transaction. Page 14 Orders Orders entered into the system can take a variety of forms. They can be either firm orders, which remain on the system for the duration of the trading session, or normal orders, which are retained by the system for only five minutes; firm orders can be canceled from the system after 10 minutes upon request. In addition, an order can be designated as either divisible or not, which determines if transactions involving only a fraction of the order amount can take place.

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