Abstract
Using the intuition that nancial markets transfer risks in \business time, we dene \market microstructure as the hypothesis that the size distribution and transaction costs of risk transfers (\bets) are constant across assets and time. Dening trading activity W as the product of dollar volume and returns standard deviation, invariance predicts that intended order size, market impact costs, and bid-ask spread costs|as fractions of volume and volatility|are proportional to W 2=3 , W 1=3 , and W 1=3 , respectively. Using calibration results from structural estimates in a companion empirical paper, we estimate the arrival rate of bets (\market velocity) and the size distribution of bets, develop formulas for estimating impact and spread costs, and describe two indices of market liquidity.
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