Conference on market microstructure.

• Position: National Bureau of Economic Research conference

The second formal meeting of the NBER's Market Microstructure Research Group, organized by NBER Research Associate Andrew Lo of MIT, took place in Cambridge on December 4. The discussion focused on the following papers:

Michael J. Fleming and Eli Remolona, Federal Reserve Bank of New York, "Price Formation and Liquidity in the U.S. Treasury Securities Market: The Response to Public Information"

Discussant: Torben Andersen, Northwestern University

Thomas Gehrig, University of Freiburg, and Matthew Jackson, Northwestern University, "Bid-Ask Spreads with Indirect Competition among Specialists"

Discussant: Eugene Kandel, Hebrew University

Martin Evans, Georgetown University, "The Microstructure of Foreign Exchange Dynamics"

Discussant: Richard K. Lyons, NBER and University of California, Berkeley

Rajesh Chakrabarti and Richard Roll, University of California, Los Angeles, "Learning from Others, Reacting, and Market Quality"

Discussant: Blake LeBaron, NBER and University of Wisconsin

Eric Ghysels, Pennsylvania State University, and Mouna Cherkaoui, University Mohammed V, "Microstructure Reforms of an Emerging Market: Do They Really Improve Trading Costs?"

Discussant: Geert Rouwenhorst, Yale University

Robert Neal, Indiana University, and Simon Wheatley, University of New South Wales, "Adverse Selection and Bid-Ask Spreads: Evidence from Closed-End Funds"

Discussant: Lawrence Harris, University of Southern California

Fleming and Remolona note that the arrival of public information in the U.S. Treasury securities market induces striking adjustment patterns for prices, trading volume, and bid-ask spreads. The release of a major macroeconomic announcement occasions a sharp and immediate price change with little trading volume, suggesting that price reactions to public information do not require trading. The bid-ask spread widens dramatically at announcement, and narrows shortly thereafter, apparently driven by inventory control rather than asymmetric information concerns. After the initial sharp price change, trading volume surges and persists with high price volatility and a slightly higher bid-ask spread, suggesting a sluggish process of price formation as the market reconciles investors differential private views.

Gehrig and Jackson examine the prices quoted by specialists (or dealers) who have monopoly power to set prices (bids and asks) for a given asset, but who face indirect competition from other specialists who trade in related assets. They...