Critical Thinking

a. price, the price at which investors are

a. What is market micro-structure?Market micro-structure, the branch of finance concerning the detailed process that occurred in the market, has evaluated significantly since 90’s due to the vast advance of telecommunication technology and information technology.  The area that study market micro-structure mainly focus on the transformation from individual’s demand to prices and volumes in the market, further reflecting environment changes, characterised by converging and interacting macro- and microeconomic forces, such as globalisation, changes in geopolitics, competition, evolving regulation and demographic shifts in modern information technologies. b. How technologies change the micro-structure of the market?Before the adaptation of modern information technology, financial markets are highly dominated by market maker system, providing liquidity by match the orders from their clients. Such a process happened in a centralized place gathering nearly all traders and brokers, such as the New York Stock Exchange (NYSE) and London Stock Exchange (LSE). With the aim of generating liquidity, market makers are under obligation to offer two ways price quotes, the bid side and the ask side. The bid-ask spread, or the market maker’s spread, – the difference between the bid price, the price at which investors are willing to buy, and the ask price, the price at which holders are willing to sell,-is the profit of market makers. Since market traders treat providing liquidity as the ultimate goal, they are obliged to meet the orders submitted by their clients, even though they may under the risk when replenish inventory by buying security at a price higher than the price they sold this security in the near past, causing a potential loss. With the help of advanced information technology, computer-based automated quoted system was introduced to the financial markets, transforming the markets from a regional centralized physical place into a global decentralized virtual platform. This transformation prominently increased the transaction speed of market, reduced the entry barrier of the market and decreased the probability of mass happening. In nearly all automatic quoting system, bid orders are listed in descending order, while ask orders are listed in ascending order, letting market orders and limit orders executed automatically at the best price. Like the NYSE, it was founded as an open-outcry auction back in the end of the eighteenth century and has evolved since then into a complex hybrid market combing an open outcry with a quote-driven (dealer) market, with an electronic Limited order book system. The dominance of the electronic limit order book has been proved by the fact that half of the world’s stock exchanges have adopted this (Jain (2002) as cited by Markose (2014))  either as the sole system or in addition to the quote drive system with designated market makers as explained above.  Nearly one third of all US stock trades in 2006 were driven by automatic trading programs and predicted a half in 2010, While over 40% of all orders in LSE were entered by algo traders in 2006, and predicted 60% in 2007.(Aite Group LLC as cited by Markose(2014))The objective of this study is to analysis the intraday price trends in a limit order book and intraday price impact for Tesco stock holding over a period from Jun 2007 to August 2008, and to analysis the inside price effect with the help of the deducted empirical results. To achieve the objective, the study replicated the Malik-Markose methodologies (2012) to build the demand and supply curves so as to detect the price trend, and compare the difference before and after the crisisThe rest of the paper is organised as follows. Section 2 provides a literature review. Section presents the methodology of this study, including the analysis method based on Motional Volume Weighted Average Price (NVWAP) and Kernel nonparametric regression for market impact analysis. Lastly, the following section 4 and 5 deliver the empirical results and the conclusions of the study, respectively.

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