Understanding High Frequency Market Microstructure

How technology transformed trading, liquidity, and research in modern markets

The structure of financial markets has changed beyond recognition. Trading no longer happens on crowded exchange floors but inside server racks and data centers. Decisions that once took minutes now unfold in microseconds. The rise of high-frequency trading (HFT) has redefined how they work.

In her seminal paper High Frequency Market Microstructure, Maureen O’Hara explores this transformation. She argues that microstructure, the study of how trading mechanisms affect price formation and liquidity, has never mattered more. As markets move faster, the rules of interaction between traders, exchanges, and algorithms determine who wins, who loses, and how information travels through the system.

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The New High-Frequency World

The high-frequency era began not just because of technology, but also because of regulation. In the U.S., Regulation ATS (2000) and Reg NMS (2007) encouraged competition among trading venues. In Europe, MiFID achieved a similar effect. The result was market fragmentation that dozens of exchanges, dark pools, and broker-dealer networks where liquidity scattered across the landscape.

In such a fragmented system, speed became power. Traders could no longer see all liquidity in one place, so those who could process and act on data faster gained an advantage. Exchanges began offering co-location services, placing traders’ servers next to the matching engine for a fee. They sold direct data feeds, providing market information milliseconds ahead of the public tape. This created a hierarchy of visibility and reaction time, a new informational asymmetry born from latency rather than knowledge.