Most retail investors buy and sell stocks without any clue about how things work behind the scenes. They have no idea how their orders are handled, and what motivates the behavior of various market participants. Although a detailed understanding of market microstructure is not necessary for investing, understanding it clears up many of the confusions that investors encounter throughout their investing journey. For active traders, understanding market structure is crucial. Traders are competing against other traders within the framework of a market. To trade profitably, traders must understand the motivations of other traders. They must also understand the rules of the market: what they can do and what they cannot. In this article, I provide a list of introductory materials for those investors and traders who want to understand the fundamentals of the market itself.
Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris
This is commonly regarded as a classic. It is written at a readable level, and introduces the reader to market microstructure. The book was published in 2003, so some of the details may be outdated. Nevertheless, most of the content is still relevant today to a broad range of markets worldwide. The book is also less US-centric than one might initially expect.
Trading and Electronic Markets: What Investment Professionals Need to Know by Larry Harris
This is a shorter and more recent book by Larry Harris, published in 2015. This book provides some newer information about markets that was not written in the 2003 book by Larry Harris. As its title suggests, it includes more information about electronic markets and trading. This is an important update, given how electronic trading has grown the last two decades. This book is published by the CFA Institute, and it is available for free in PDF format.
- SIFMA Market Structure Primers
SIFMA, the industry trade group for US securities firms, banks and asset management companies, has published several "primers" about US market structures. Of particular interest are:
US Fixed Income Market Structure Primer — For bonds and other fixed income securities.
Electronic Trading Market Structure Primer — For electronic trading.
And other primers for IPOs, ETFs, and options.