Market Microstructure

Overview

Class Central Tips

Within this course you will learn about price formation and liquidity in securities markets. You will discover the determinants of market depth and security trading. In particular, the course focuses on price formation and liquidity in securities markets. The main issues covered are how to measure trading costs; how security prices, their liquidity and speed of price discovery are jointly determined, and how order flow affects prices; what are the determinants of market depth; how security trading is organized and regulated and how it has been reshaped by algorithmic and high frequency trading; how the organization of security trading affects trading costs and informational efficiency.

Syllabus

Basics

This module presents the subject of the course and its main concepts: liquidity and price discovery, and basic notions of trading in securities markets.

Measuring liquidity

In this week you will learn that some trading costs are explicit, others implicit, and how to measure trading costs using different types of data. Furthermore, you will learn how to take the time dimension of trading into account.

Price dynamics and Liquidity (part 1)

This module talks about price formation in markets with asymmetric information. You’ll understand why in these markets prices respond to the order flow and you’ll know how the informativeness of the order flow affects market liquidity and price discovery.

Price dynamics and Liquidity (part 2)

In this week we’ll talk about frictions that contribute to the bid-ask spread and generate mean reversion in prices and you’ll learn about order processing costs. Moreover, you’ll know the imperfect competition among market makers and how inventory holding costs of risk-averse dealers.

Trade side and Market Depth

This week will explain how orders of different sizes have a different impact on prices and how price impact is an inverse measure of market depth. You’ll learn that depth is affected by order flow informativeness, market risk absorption capacity and competition between liquidity suppliers.

Algorithmic and High-Frequency Trading

By the end of this week, you will learn the fundamentals of algorithmic and high-frequency trading, their impact on market quality, and explore policies to mitigate trading speed effects.