The market microstructure of financial markets is a fascinating field: the old customs for trading of financial assets and contracts had been codified on computer algorithms, allowing for their execution at sub-luminal speed. The analysis of market microstructure, through stylized and econometric models, is an overlooked but necessary skill for the high frequency trader to survive in an ever-changing environment, to better understand the dynamics of price formation in financial markets and how the most seemingly innocuous of the rules could alter the short-run behavior of securities prices.

It’s worth recollecting the strengths and weaknesses of the fundamental books of the field here since I’ve read all of them and each one offers an interesting point of view of the subject. And reading at least two of the better would be an excellent introduction to the specialized literature:

• [amazon_link id=“0195144708” target=“_blank” ]Trading and Exchanges: Market Microstructure for Practitioners[/amazon_link]. Excellent introductory textbook on how financial instrument trading works, comprehensive yet accessible to every public. It offers a high-level, non-technical and non-quantitative, recollection of insights of the different institutions, incentives and techniques of all the market players, resulting from years of experience of its author, as well as structural and regulatory issues, plus a stylized overview of the most common microstructure effects. The only negative aspect is that it’s almost a decade old and, even if fundamental market microstructure didn’t change much, technology really did.
• [amazon_link id=“0631207619” target=“_blank” ]Market Microstructure Theory[/amazon_link]. The classical introduction to microstructure theory, now dated, provides an excellent mathematical introduction to the field for the researcher through a systematic presentation of the basic models and results.
• [amazon_link id=“026262205X” target=“_blank” ]Microstructure Approach to Exchange Rates[/amazon_link]. This book covers FX market microstructure all the way through theoretical and empirical models. Although dated, it’s indispensable to understand the idiosyncratic nature of exchange-rate markets.
• [amazon_link id=“0195301641” target=“_blank” ]Empirical Market Microstructure[/amazon_link]. Brief, updated and quantitative book, perfect for an intensive intermediate course on equity market microstructure with an emphasis on the econometrics, but neither on the real world implementation nor technical issues.
• [amazon_link id=“0521867843” target=“_blank” ]The Microstructure of Financial Markets[/amazon_link]. The most updated book of this list, it’s perfect for an advanced graduate course with an emphasis on the empirical models of market microstructure. Recommended for its in-depth treatment of transactions costs and their effects on return on investment.