Course 2024-2025 a.y.

20252 - INFORMATION AND THE ARCHITECTURE OF FINANCIAL MARKETS

Department of Finance

Course taught in English

Class timetable
Exam timetable
Go to class group/s: 31
CLMG (6 credits - I sem. - OP  |  SECS-P/01) - M (6 credits - I sem. - OP  |  SECS-P/01) - IM (6 credits - I sem. - OP  |  12 credits SECS-P/01) - MM (6 credits - I sem. - OP  |  SECS-P/01) - AFC (6 credits - I sem. - OP  |  SECS-P/01) - CLELI (6 credits - I sem. - OP  |  SECS-P/01) - ACME (6 credits - I sem. - OP  |  SECS-P/01) - DES-ESS (6 credits - I sem. - OP  |  SECS-P/01) - EMIT (6 credits - I sem. - OP  |  SECS-P/01) - GIO (6 credits - I sem. - OP  |  SECS-P/01) - DSBA (6 credits - I sem. - OP  |  SECS-P/01) - PPA (6 credits - I sem. - OP  |  SECS-P/01) - FIN (6 credits - I sem. - OP  |  SECS-P/01) - AI (6 credits - I sem. - OP  |  SECS-P/01)
Course Director:
BARBARA RINDI

Classes: 31 (I sem.)
Instructors:
Class 31: BARBARA RINDI


Suggested background knowledge

Basic fundamentals of Mathematics and Statistics.

Mission & Content Summary

MISSION

The objective of this course is to provide a comprehensive guide to the theoretical and empirical works in the field of market microstructure. Market microstructure involves studying the pricing process under explicit trading rules. While financial economics typically does not focus on the mechanics of trading, microstructure literature examines how different trading mechanisms impact the price formation process. Therefore, unlike the traditional asset pricing approach, this field of research emphasizes the significance of transaction costs, asymmetric information, and agents' strategic behavior. The course is divided into three main sections: 1. Institutions: A thorough description of the core features of financial market structures. 2. Theory: A detailed study of fundamental and advanced models of market microstructure, including how sophisticated electronic trading platforms function. The results of these models will be used to discuss issues in financial market design and regulation. 3. Empirical Microstructure: Testing empirical predictions from theoretical models and using empirical (structural) models to estimate transaction costs. This section will also employ an event study approach to investigate market design issues such as the role of market makers, dark trading, tick size, high-frequency trading, algorithmic trading, and competition in trading fees.

CONTENT SUMMARY

Institutions:

  • Description of how a limit order book works, including market structures, market participants, orders and order properties.
  • Trading rules, such as order precedence and trade pricing rules, and price discovery.
  • High-Frequency Trading, Algorithmic Trading and Dark Pool regulation.

Theory:

  • Models of dealer markets, including OTC markets and dealer-based NASDAQ.
  • Information-based models of batch auctions, such as opening/closing auctions or intraday auctions.
  • Models of auction markets, including specialist-based NYSE, price discovery, and trading strategies.
  • Models of Limit Order Books, including order-driven NASDAQ, NYSE, ATS, MTF, Euronext, Millennium, etc.
  • Models of intermarket competition, including Dark Pools, Tick Size, and Trading Fees.
  • Introduction to the concept of cancellation and to models where investors have the ability to manipulate equilibrium prices. This will include theoretical frameworks, practical examples, and the potential implications of such manipulations in financial markets.
  • Introduction to Centralized vs. Decentralized Markets

Empirical Microstructure:

  • Empirical models of the bid-ask spread, including order processing, inventory, and adverse selection.
  • Estimation of the probability of informed trading (PIN) and its extensions.
  • Analysis of price discovery and the price effect of trading.
  • Empirical evidence on High-Frequency Trading, Algorithmic Trading, Dark Pools, Tick Size regulation, and Pricing Structure.

Intended Learning Outcomes (ILO)

KNOWLEDGE AND UNDERSTANDING

At the end of the course student will be able to...

At the end of the course, students will be able to thoroughly understand and critically assess the current literature on the design and regulation of financial markets.

APPLYING KNOWLEDGE AND UNDERSTANDING

At the end of the course student will be able to...

Teaching methods

  • Lectures

DETAILS

There will likely be a trading game.


Assessment methods

  Continuous assessment Partial exams General exam
  • Written individual exam (traditional/online)
     x

ATTENDING STUDENTS

Written individual exam


NOT ATTENDING STUDENTS

Non Attending students will have the option of either sitting the written exam or writing an essay on a topic agreed with the course coordinator


Teaching materials


ATTENDING AND NOT ATTENDING STUDENTS

  • Lecture notes (BBoard).
  • Articles from Journals: a detailed reading list is provided at the beginning of the course.
  • DE JONG , RINDI, The Microstructure of Financial Markets, Cambridge University Press, 2009.
  • HARRIS, Trading and Exchanges , Oxford University Press, 2003.
  • JOHNSON, Algorithmic Trading & DMA, Myeloma Press, 2010.
Last change 23/07/2024 15:46