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According to economic theory, markets achieve optimal capital allocations through the classical risk/return tradeoff that is the keystone of modern finance. But this theory takes the market as a black box, where information goes in and an efficiently determined price comes out.
Increasingly, microstructure theory highlights the importance of stock market institutional features and trading mechanisms as important determinants of market behavior. These new theories suggest that policymakers and market administrators, through their choice of trading systems and other institutional features, can influence trading and price behavior. To the extent this also translates into more efficient determination of prices and lower transaction costs, then all concerned--both investors and securities issuers--are...