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In this article we revisit the classic problem of tatonnement in price
formation from a microstructure point of view, reviewing a recent body
of theoretical and empirical work explaining how fluctuations in
supply and demand are slowly incorporated into prices. Because
revealed market liquidity is extremely low, large orders to buy or
sell can only be traded incrementally, over periods of time as long as
months. As a result order flow is a highly persistent long-memory
process. Maintaining compatibility with market efficiency has profound
consequences on price formation, on the dynamics of liquidity, and on
the nature of impact. We review a body of theory that makes detailed
quantitative predictions about the volume and time dependence of
market impact, the bid-ask spread, order book dynamics, and
volatility. Comparisons to data yield some encouraging successes.
This framework suggests a novel interpretation of financial
information, in which agents are at best only weakly informed and all
have a similar and extremely noisy impact on prices. Most of the
processed information appears to come from supply and demand itself,
rather than from external news. The ideas reviewed here are relevant
to market microstructure regulation, agent-based models, cost-optimal
execution strategies, and understanding market ecologies
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