This paper predicts the formation of microstructures within a granular material undergoing biaxial compression. Using the discrete element method we have tested ensembles of particles of varying geometric shape and size. The tests predict that the motion of the particles deviates significantly from that predicted by continuum theory. The particles form localized coherent structures (here called circulation cells) in which groups of particles instantaneously behave as a rigid body. These circulation cells migrate and coalesce to form larger structures. Eventually a global shear band forms at the boundary of two or more of the circulation cells.