Trading and Market Microstructure

Objectives

By the end of the course, the students should have an understanding of the current financial market landscape, of how prices are determined, and of the role of, and opportunities and dangers facing, traders in this setting.

Description / Program

The course discusses the functioning of financial markets and trading and price determination in these markets. Topics covered include order submission and trading strategies, market structure and quality, settlement, transaction costs and liquidity, bubbles and crashes, price formation and technical analysis. The lectures will draw on academic and practitioner research as well as information from markets. The course is technical at some points but I will emphasize intuition and practical applications.

Topics:

TOPIC 1. ORDERS

• Orders and their characteristics
• Types of orders
• Advantages and disadvantages of each order type
• Trade settlement, including settlement protocols and procedures, risks, and the role of depositories and custodians

TOPIC 2. MARKETS

• Market structure and its importance
• Types of market structures and their characteristics
• Market evolution and competition

TOPIC 3. TRANSACTION COSTS

• Digression: Trader types and some theory
• Importance of transaction costs
• Measuring transaction costs
• Determinants of transaction costs

TOPIC 4. LIQUIDITY

• Liquidity and its importance
• Liquidity providers
• Measuring liquidity
• Episodes of illiquidity
• Liquidity comovement and liquidity risk

TOPIC 5. NON-EQUITY MARKETS

• The FX market
  • Dealer versus retail trades

• The bond market
  • Government bonds
  • Corporate bonds

TOPIC 6. INSTITUTIONAL TRADES

• Institutional trading patterns
• Features of institutional trading
• Hedge fund trading and the tech bubble
• High frequency trading

TOPIC 7. MARKET QUALITY AND PRICE FORMATION

• Market efficiency, the random walk and autocorrelations in returns
• Cross-autocorrelations in returns
• Volatility
• Market links, spillovers and arbitrage
• Market manipulation

TOPIC 8. BEHAVIORAL ASPECTS OF TRADING

• The plausibility of behavioral finance: A trading perspective
• Behavioral finance and trading

TOPIC 9. CRASHES, BUBBLES AND SPECULATION

• Bubbles
• Crashes
• Market breakdowns
• Regulatory tools

TOPIC 10. TECHNICAL ANALYSIS AND PREDICTION

• What is technical analysis?
• Simple methods
• Macro prediction

Learning Method / Style of Lessons

The lectures are discussion-style and highly interactive. In covering a topic, concepts are explained first, and this is followed by a question- and event- oriented discussion of their practical applications. Learning is facilitated though a focus on these applications and student participation. A set of power point slides to be handed out in advance forms the basis for the lectures.

Exam Style

Grades will be based on an exam, to be held during the normal exam period.

Readings/Textbooks

There is no textbook for the course. Students are expected to review and understand the material covered in the power point handouts. An optional reading list will also be provided.