Course: Market Microstructure
Modules:
Introduction, Perfect vs. real-world financial markets, Liquidity, Price discovery, Why should we care?, Market microstructure and empirical puzzles, Policy Issues, Where does trading occur?, Who trades securities?, The life-cycle of an order, The two basic trading mechanisms: limit order and dealer markets, Limit order markets: how do they work?, Dealer markets: how do they work?, Many real-world markets are dual or hybrid, Dimensions in which market platforms differ, Market transparency, Frequency of trading, Interplay of public regulation and self-regulation, Role of competition between market platforms in shaping their design, Effect of changes in regulation on competition between platforms, Effect of changes in technology on trading strategies and competition between platforms
Explicit and implicit trading costs, Breaking down implicit trading costs, Data requirements of implicit trading cost measures, Quoted spread, Effective spread, Realized spread, Value-Weighted Average Price (VWAP), Price Impact, Example of estimates of price impact, Amihud Illiquidity Ratio, Other volume-based measures, Definition and rationale of Roll's measure, Assumptions and derivation of Roll's measure, Possible biases in Roll's measure, Bias in Roll's measure due to unbalanced order flow, Bias in Roll's measure due to autocorrelated order flow, Bias in Roll's measure if the order flow is informative, Bias in Roll's measure if there is a trend in expected returns, Empirical performance of Roll's measure, Time dimension of liquidity, Implementation shortfall, Intuitive meaning
Real-world intraday price fluctuations, Price formation in a frictionless world, Real-world intraday price fluctuations, The static Glosten-Milgrom model, Learning from the order flow, Derivation of the first ask in the trading day, Derivation and properties of the bid-ask spread, Dynamics of quotes in the Glosten-Milgrom model, Derivation and properties of the bid-ask spread at any time in the trading day, Price dynamics in response to the order flow, Belief dynamics and price dynamics, Dual role of equilibrium bid and ask quotes, Price discovery and informational efficiency, Dynamics of squared pricing errors, Tradeoff between speed of price discovery and market illiquidity, Return volatility
Short term reversal in asset prices following an order, Can informed trading account for such price reversals?, Introduce order processing costs and inventory holding costs, Bid-ask spread with order processing costs, Price dynamics with order processing costs, Short-run price impact with order processing costs, Long-run price impact with order processing costs, Dealer rents or order processing costs?, Prices and bid-ask spread with inventory holding costs, Price pressure from the order flow, Move to a dynamic model of prices with inventory holding costs, Dynamic optimization by dealers, Price dynamics with inventory holding costs, Inventory and price dynamics with inventory holding costs, Testable implications of the dynamic inventory holding cost model, Price dynamics if asymmetric information, order processing costs and inventory holding costs are all present
Societé Generale, January 2008, Depth vs. liquidity, Assumptions of the Kyle model, Steps in solving the model, First step: market makers' inference, Second step: imposing market makers' zero-profit condition, Third step: choice of the trade size by the informed investor, Fourth step: Nash equilibrium, Equilibrium market depth and expected profits of the insider, Introducing imperfect competition in the Kyle model, Market depth with imperfect competition in the Kyle model, Optimization by competitive and risk-averse market makers, Equilibrium price with competitive and risk-averse market makers, Depth with competitive and risk-averse market makers, Introducing imperfect competition in the model, Depth with imperfectly competitive and risk-averse market makers, Risk sharing with perfectly and imperfectly competitive market makers
Definition of algorithmic and high-frequency trading, Types of algo trading strategies, Potential effects on market liquidity, Empirical evidence regarding the effects on market liquidity, Effects on price discovery, Effects on market manipulation, Modelling investment in speed as an arms race, Determination of quotes and of the competitive bid-ask spread, Speculators' expected profits and choice of speed, Nash equilibrium where all speculators are fast, Inefficiency of the investment in speed, Investment in speed by market makers, Effect of high-frequency trading on operational risk, Effects of high-frequency trading on market liquidity and stability, Slowing down trading