Financial Market Microstructure

FIN532 Financial Market Microstructure

  • Topics

    Topics

    • Financial markets
    • Market structure
    • High-frequency trading
    • Asset pricing

  • Learning outcome

    Learning outcome

    This course provides students with a general understanding of the field of financial market microstructure, The main emphasis of the course, which is taught by two pioneers in the field of financial market microstructure, is on market making and trading in a high-frequency world. The course starts with an introduction to the basic 'plumbing' of markets, to the role of information and its impact on liquidity and asset pricing, to recent issues on high-frequency trading. Both theoretical and empirical research in the field will be covered.

     

    Completing the course will enable you to:

    1. Explain how financial markets work
    2. Understand the risks and rewards of market making
    3. Apply information-based microstructure models
    4. Explain the concept of PINs and VPINs and their application to the flash crash
    5. Understand the relationship between information and the cost of capital
    6. Explain the role of ambiguity in markets and its importance for liquidity and opaque trading
    7. Critically reflect on the advantages and disadvantages of trading in a high frequency world

  • Teaching

    Teaching

    The course covers the field of financial market microstructure in 6 two hours lectures, total teaching time is 12 hours: 1. Introduction to Market Making: How Markets Work; 2. Information-Based Microstructure Models; 3. PINs and VPINs; 4. Information and the Cost of Capital; 5. Ambiguity in Markets; and 6. The High Frequency World.

  • Requirements for course approval

    Requirements for course approval

    Written literature survey paper on topic covered on course (maximum 3,000 words - grade system approved/not approved)

  • Assessment

    Assessment

    Written paper.

  • Grading Scale

    Grading Scale

    Pass - Fail

  • Computer tools

    Computer tools

    none

  • Semester

    Semester

    Spring: June 6-7, 2016

  • Literature

    Literature

    • O'Hara, M., 2003, Presidential Address: Liquidity and Price Discovery, Journal of Finance.
    • O'Hara, M, 2015, High Frequency Market Microstructure, Journal of Financial Economics.
    • Grossman, S. and J. Stiglitz, 1980, On the Impossibility of Informationally Efficient Markets, American Economic Review.
    • Glosten, L. R. and P. Milgrom, 1985, Bid, ask and transaction prices in a specialist market with heterogeneously informed traders, Journal of Financial Economics.
    • Easley, D. and M. O'Hara, 1987, Price, Trade Size, and Information in Securities Markets, Journal of Financial Economics.
    • Easley, D. and M. O'Hara, 1992, Time and the process of security price adjustment, Journal of Finance.
    • Kyle, Albert S., 1985, Continuous Auctions and Insider Trading, Econometrica.
    • Easley, D., N. Kiefer, and M. O'Hara, 1997, One Day in the Life of a Very Common Stock, Review of Financial Studies.
    • Easley, D, N. Kiefer, M. O'Hara and J. Paperman, 1996, Liquidity, Information and Infrequently Traded Stocks, Journal of Finance.
    • Easley,D., Hvidkjaer, S. and M. O'Hara, 2004, Is Information Risk a Determinant of Asset Returns? Journal of Finance.
    • Easley, D., M. Lopez de Prado, and M. O'Hara, 2012, Flow Toxicity and Volatility in a High Frequency World, Review of Financial Studies.
    • Easley,D., Hvidkjaer, S. and M. O'Hara, 2004, Is Information Risk a Determinant of Asset Returns? Journal of Finance.
    • Easley, D., M. O'Hara, and L. Yang, Differential Access to Price Information, Journal of Financial and Quantative Analysis, forthcoming.
    • Easley, D. and M. O'Hara, 2010, Liquidity and Valuation in an Uncertain World, Journal of Financial Economics.
    • Easley, D. and M. O'Hara, 2010, Microstructure and Ambiguity, Journal of Finance.
    • Easley, D., M. O'Hara and L. Yang, 2014, Opaque Trading, Disclosure and Asset Prices: Implications for Hedge Fund Regulation, Review of Financial Studies.
    • Easley, D., M. Lopez de Prado, and M. O'Hara, 2015, Discerning Information from Trade Data, Journal of Financial Economics, forthcoming.
    • Easley, D., M. Lopez de Prado, and M. O'Hara, 2015, Optimal Execution Horizon, Mathematical Finance, forthcoming.

     

    Recommended reading:

    • Resource for theoretical microstructure: O'Hara, M., Market Microstructure Theory (Blackwell: 1995).
    • Resource for empirical microstructure: Hasbrouck, J., Empirical Market Microstructure (Oxford University Press: 2007).

Overview

ECTS Credits
2.5
Teaching language
English.
Semester
Spring

Course responsible

Professor David Easley and Professor Maureen O'Hara - Cornell University

Klaus Reiner Schenk-Hoppé, University of Manchester and Adjunct Professor at the Department of Finance NHH