Analyse how the market micro-structure theory aims to explain stock price formation and evaluate how it differs from the efficient market hypothesis. (20 marks)

Market microstructure is reflection of the study of the financial market and how they are operating so it will be researching primarily focused upon the structure of the exchanges and the trading venues and it will also offer with the price discovery process and determinant of spread and quotes as well as intraday trading behaviour in the transaction cost or market microstructure continues to be reflecting the evolution of the financial Markets and it will be trying to to reflect the valuation technique to uncover the fair market value of the instrument so it will be based upon the expected return forecast as well as the risk modelling technique and it will also focus upon the bottom up approach to determine the fair value of the company by examining the balance sheet of a company as well as the fundamental and sales figure and year over year growth and the revenue forecast of the company, so it can also use top down approach to determine the proper valuation of the company so it is trying to find out the intrinsic valuation of the company and then it will be also reflecting the the investor's with fair and transparent price discovery and liquidity snapshot.

It is different from the Efficient market hypothesis because Efficient market hypothesis advocates that all the privately available information and publicly available information have been already discounted into the stock price and there is no scope for making any additional rate of return into the market, so the investors should be trying to focus upon passive investment strategy and he should not be trying to to apply various kinds of approach in order to outperform the market and hence it can be said that financial markets can be outperformed according to the market microstructure theory, which is against the Efficient market hypothesis.