Regulating Market Microstructure

Thomas H. Ernst () and Chester S. Spatt ()
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Thomas H. Ernst: Robert H. Smith School of Business, University of Maryland, College Park, Maryland, USA
Chester S. Spatt: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania, USA

Annual Review of Financial Economics, 2025, vol. 17, issue 1, 173-187

Abstract: This article provides an overview of the regulation of market microstructure, particularly in equity and option markets. We emphasize the motives for regulation and restrictions on the trading process, including the distinctive regulatory environments (and regulators) for different financial instruments as well as the role of brokers in routing trades, and market makers who intermediate trade. Our article highlights such central features of the design of markets as best execution responsibilities; order protection (trade-through) restrictions (Regulation NMS); payment for order flow, tick size, and access fees; and the role of auctions, transparency, and short-selling restrictions. We point to some of the distinctive features of fixed-income trading and market design and the emerging role of litigation in determining regulatory outcomes.

Keywords: brokers; equity markets; options; market makers; Regulation NMS; trading (search for similar items in EconPapers)
JEL-codes: G10 G14 G18 G23 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1146/annurev-financial-112923-112656

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