Modern Market Microstructure: Liquidity, Volatility and Stability (2025)
This review was undertaken at the request of the Financial Conduct Authority (FCA) and funded through an FCA grant.
Market microstructure studies how the design and evolution of financial markets shape price formation, liquidity, and financial stability. I review the literature on the link between market liquidity and volatility, focusing on how shifts in market participation, the growth of algorithmic and high-frequency trading, the rise of passive investing, and the increasing role of non-bank institutions have influenced modern market dynamics. I also review papers on the impact of retail trading, market fragmentation across exchanges, and the role of dark pools and systemic internalisers in European and UK markets. Additionally, I conclude with a discussion on how the rise of decentralized finance (DeFi) and private markets introduces new challenges and opportunities for liquidity provision and market stability.