Behind the price: on the role of agent's reflexivity in financial market microstructure

In this chapter we review some recent results on the dynamics of price formation in financial markets and its relations with the efficient market hypothesis. Specifically, we present the limit order book mechanism for markets and we introduce the concepts of market impact and order flow, presenting their recently discovered empirical properties and discussing some possible interpretation in terms of agent's strategies. Our analysis confirms that quantitative analysis of data is crucial to validate qualitative hypothesis on investors' behavior in the regulated environment of order placement and to connect these micro-structural behaviors to the properties of the collective dynamics of the system as a whole, such for instance market efficiency. Finally we discuss the relation between some of the described properties and the theory of reflexivity proposing that in the process of price formation positive and negative feedback loops between the cognitive and manipulative function of agents are present.