I see that term tossed around a lot, in articles relating to HFT, and ultra high frequency data.
It says at higher frequencies, smaller intervals, microstructure noise is very dominant.
What is this microstructure noise that they refer to?
Answer
The term has a different meaning to different people.
to econometricians, microstructure noise is a disturbance that makes high frequency estimates of some parameters (e.g. realized volatility) very unstable. Generally this strand of the literature professes agnosticism as to the its origin;
to market microstructure researchers, microstructure noise is a deviation from fundamental value that is induced by the characteristics of the market under consideration, e.g. bid-ask bounce, the discreteness of price change, latency, and asymmetric information of traders. The last example is frequently cited but I don't think it is accurate. Asymmetric information does not have to be a microstructure phenomena, although it can be partly driven by architectural properties of the market.
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