Abstract
The success of any financial market depends on the ability of the market to determine the proper price for the assets traded in the market. This can be achieved by matching the demand and supply in an efficient and effective manner. An efficient market should provide enough liquidity for the assets traded in the market. The role of the market maker in providing liquidity is widely recognized, but liquidity can also arise from other aspects of the trading mechanism. Liquidity in the market depends on many macro-economic factors like country’s financial policy, regulatory environment, interest rates, inflation and market micro-factors like the type of asset that is traded, the price of the asset, the structure of the market or the market design, the protocol that is followed in determining the price, information about the asset that is traded, market participants, ability of the participants to observe the information and use the same for making purchase and sale decisions and finally the transaction cost involved in the process of buying and selling.

This white paper studies the impact of some of the important market micro-factors mentioned above on the price of the asset traded in the market. The study involves an understanding and analysis of how these micro factors affect the asset price and liquidity in the market.

Author Giridhar

Download this paper