Trading and Market Microstructure
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 focus on intuition and practical applications.
The set of topics typically covered follows.
TOPIC 1. ORDERS AND SETTLEMENT
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
Episodes of illiquidity
Liquidity comovement and liquidity risk
TOPIC 5. NON-EQUITY MARKETS
FX market structure and trading procedures
FX dealer versus retail trades
Bond market structure and trading procedures
Government bond microstructure
Corporate bond microstructure
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
Market links, spillovers and arbitrage
TOPIC 8. BEHAVIORAL ASPECTS OF TRADING
The plausibility of behavioral finance: A trading perspective
Behavioral finance and trading
TOPIC 9. CRASHES, BUBBLES AND SPECULATION
TOPIC 10. TECHNICAL ANALYSIS AND PREDICTION
What is technical analysis?
There is no required textbook, and the handouts are intended to be self-standing. An optional reading list, with relevant papers and books for interested students to reference, is provided.
By the end of the course, the students should have an understanding of the current financial market landscape, the role of traders, the trading and price determination processes, and the opportunities and dangers confronting traders.
The lectures are discussion-style and interactive. In covering a topic, concepts are explained first, and this is followed by an example-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.
Compliant with COVID-19 guidelines
Grades will be based on a written exam, to be held during the normal exam period. Exam questions will come from material covered during the lectures.