Summary of the research
The optimal design of financial markets has long been an important field in economics. What type of market maximizes welfare and is thus most desirable? And, does it arise naturally or might we be stuck in a sub-optimal equilibrium? In finance, the field is referred to as microstructure.
Microstructure research moved center stage in recent decades as exchange floors were replaced by computers matching buy and sell orders. Traders, in turn, coded their trading strategies into computer algorithms and let “robots” execute them on their behalf. This development received lots of public attention, in particular after Michael Lewis published the instant best seller Flash Boys in 2014. Regulators worldwide struggled to take a position as to whether the new microstructure was good for investors and the economy at large. Microstructure papers benefitted from the attention and appeared in the very top journals in finance and economics (see Menkveld, 2016, for a survey).
The arrival of electronic markets is only the beginning of how financial technology (FinTech) will reshape the financial industry, says Mark Carney, current chairman of the FSB, a consortium of central bankers world-wide. The academic community agrees. Leading scholars conclude that FinTech will alter financial institutions and markets in ways that existing knowledge about them is of little use. Moreover, the ensuing digital economy will produce big data in need of being processed meaningfully to both understand and control the new financial system.