market architecture of selected stock exchanges in ... - Gilles Daniel

11 Introduction1.1 Motivation and Objective of the ThesisDuring the last quarter century, exchange market and banking crises have newlyaroused interest in the regulation and supervision of financial markets. Given thattheir quality depends on rules determining the organization and regulation of thetrading process and the design of market structure, this has become subject to a newarea of research: the market microstructure theory.Market microstructure concentrates on the design of the market, on organizationaland regulatory features of the market settings and their impact on the price discoveryprocess, liquidity, information asymmetry, and volatility. Furthermore, it analyzesparticipants and their ability to observe information and use for making purchase andsale.The purpose of this paper, unlike market microstructure theory, is not to highlight theliquidity of an exchange and the use of information in the actual trading but ratherthe structural rules and their trading process on the stock exchange. However, sincethe theory emphasizes those issues, too, this study incorporates some of its keyfactors. The so-called market architecture designates the full set of rules andregulations governing the exchanges and is of utmost importance to get a detailedcomparison of stock exchanges. To emphasize the significance of market regulation,Coase states that “free markets require considerable internal infrastructure and selfregulationto function efficiently with minimal transaction costs” (Goodhart 1998,p.3). However, free financial markets may not have the same level of regulation andthrough their macroeconomic environment they may also differ in depth, liquidityand volatility. This becomes obvious considering developed and emerging financialmarkets.Financial markets in emerging countries are financially weak in comparison with