How to configure Magento to have subdomains for each vendor
Configure webserver to point all subdomains to Magento root.
Make wildcard DNS to point all subdomains to the same server, or add subdomains to DNS for every new vendor, depends on how often you have new vendor registrations.
Set Admin > System > Configuration > Web > Default Pages > Default Web URL = "umicrosite"
In addition you might need to set "Configuration > Web > Redirect to Base URL if requested URL doesn't match it = No", otherwise vendor urls will redirect to website base URL
Also you can consider "Configuration > Drop Shipping > MicroSite Options > Update Store Base URL". This allows you to change urls on microsite pages to http://vendor.domain.com/
(depends on how you configured "Configuration > Drop Shipping > MicroSite Options > Subdomain level to use for vendor")
And make sure you have URL Key set in vendor preferences.
As long as vendor landing page show Layered Navigation make sure you set "Is Anchor" = Yes for store root category.