Essays in Financial Market Microstructure.

Summary In the first chapter, I show that traditional liquidity measures, such as market depth, are not always relevant for measuring investor welfare. I build a model of an order-driven market and show that high liquidity supply can correspond to poor execution conditions for liquidity providers and relatively low welfare.In the second chapter, I model the speed of price adjustments to news arrivals in order-driven markets, when investors have limited attention capacity.Due to their limited attention, investors imperfectly follow news arrivals. Due to their limited attention, investors imperfectly follow the arrival of news, so prices adjust to the news after a certain delay. This delay decreases as the level of attention of investors increases.The delay in price adjustment also decreases as the frequency at which news arrives, increases. The third chapter presents a work written in collaboration with Thierry Foucault. We build a model to explain how high-frequency trading can generate "mini-flash crashes" (a sudden change in price followed by a very rapid return to the previous level). Our theory is based on the idea that there is a tension between the speed at which information can be acquired and the accuracy of that information. When high-frequency traders implement strategies involving rapid reactions to market events, they increase their risk of reacting to noise and thus generate "mini flash crashes". Nevertheless, they increase the informational efficiency of the market.