Course 2014-2015 a.y.

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  |  SECS-P/01) - MM (6 credits - I sem. - OP  |  SECS-P/01) - AFC (6 credits - I sem. - OP  |  SECS-P/01) - CLAPI (6 credits - I sem. - OP  |  SECS-P/01) - CLEFIN-FINANCE (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)

Course Director:
BARBARA RINDI

Course Objectives

The objective of this course is to provide a comprehensive guide to the theoretical and empirical works developed in the field of market microstructure. Market microstructure is about studying the pricing process under explicit trading rules. While financial economics usually does not focus on the mechanics of trading, microstructure literature studies how different trading mechanisms affect the price formation process. 

Therefore, contrary to the traditional asset pricing approach, this field of research assigns a role to transaction costs, asymmetric information and agents' strategic behaviour. 

The course is divided into three main sections.

• Institutions: thorough description of the core features of financial markets structure.
• Theory: focus on the fundamental models of market microstructure and on some more advanced models that describe how the most sophisticated electronic platforms for trading financial instruments work; use of the models' results to discuss issues on financial market design and regulation.
• Empirical microstructure: test of the empirical predictions from the theory and use of empirical (structural) models to estimate transaction costs and to explain the components of the bid-ask spread.Event study approach to investigate issues in market design: role of market makers, circuit breaker and market crashes, competition in trading fees.

Course Content Summary

Institutions: 

• Brief description of how a limit order book works: market structures, market participants, orders and order properties; trading rules (order precedence and trade pricing rules) and price discovery. High Frequency Trading and Dark Pool regulation.

Theory: 

• Models of dealer markets: OTC markets and dealer-based NASDAQ.
• Information-based models of batch auctions (as opening/closing auctions or intraday auctions).
• Models of auction markets (specialist-based NYSE), price discovery and trading strategies.
• Inventory-based models and tests of empirical predictions.
• Models of Limit Order Books: order-driven NASDAQ, NYSE, ATS, MTF, Euronext, Millennium etc.
• Models of intermarket competition: Dark Pools and Tick Size. 

Empirical microstructure: 

• Empirical models of bid-ask spread: order processing, inventory and adverse selection.
• Estimate of the probability of informed trading (PIN) and extensions.
• Price discovery and the price effect of trading.
• Empirical evidence on High Frequency Trading, Dark pools, Tick Size regulation and Flash Crashes.

Detailed Description of Assessment Methods

• Attending students are gradedthrough a written final exam.
• Special assessments for non-attending students (e.g. written paper) are left to the discretion of the lecturer.

Textbooks

• Lecture notes (e-learning)
• 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