Abstract
This chapter discusses the organization of securities markets. A trading mechanism defines the “rules of the game” that market participants must follow: it determines the actions they can take, their information about other market participants' actions, and the protocol for matching buy and sell orders. Trading mechanisms can essentially be viewed as variations of two basic structures: limit order markets and dealer markets. Section 1.2 describes how each mechanism operates, illustrates market structures that combine elements of both, and shows that each prototypical mechanism itself can vary in important ways, such as the degree of transparency and the frequency of trades. Section 1.3 previews some empirical studies that compare limit order and dealer markets or investigate markets with different degrees of transparency. Section 1.4 discusses the evolution of market structure. The final sections provide suggestions for further reading and exercises.
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