By Jack D. Glen

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

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While prices are expected to vary over time to reflect changes in relative and absolute value, the concern over volatility is that short-term price movements do not correctly reflect changes in equilibrium value. The links to both liquidity and efficiency are obvious. For example, liquid markets have lower transaction costs, especially bid/ask spreads and, as a result, the observed sequence of trading prices will be less volatile as the natural bouncing of transactions between the bid and ask occurs over time.

While much of that influence arrives through the effect of microstructure on information processing and transaction costs, the impact carries over to each of the other functions mentioned above as well, something described in more detail below. Given the importance of financial markets more generally and the impact that microstructure can have on their success, it behooves market participants, regulators and administrators alike to understand better at least the basic tenets of market microstructure.

Page 9 All of the emerging markets described below have order-book systems. Two of those markets, BEC and SET, have completely automated order-matching systems; for JSE and (roughly half of the shares traded on) ISE the order books are manually maintained. In each of these four markets, the order book is the medium through which all transactions occur. 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.

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