Trading, Liquidity, and Pricing in Securities Markets

FIE447 Trading, Liquidity, and Pricing in Securities Markets

  • Topics

    Topics

    This course deals with how financial securities are traded, and how the structure of markets affects price formation, market liquidity, and asset allocation. In most finance courses, the mechanism behind the determination of prices is treated as a black box. In this course the box will be opened and we will study how actual market trading mechanisms and market participants affect pricing, liquidity, and asset allocation.

    We will study how trading frictions generate deviations of assets prices from their fundamental value and how these deviations are exploited through arbitrage; how prices are formed when markets are designed as limit order markets, dealer markets, dark pools and call auctions; how market liquidity is defined and how it is affected by market design, market participants, and how market liquidity in turn affects the decisions of the various market participants.  Topics are: 

     

    • Market efficiency and arbitrage
    • Trading mechanics and market structure
    • Defining, measuring, and estimating market liquidity
    • Trading and price discovery
    • Key players of the trading industry
    • Market design and regulation
    • Market transparency
    • The effect of liquidity, and price discovery on corporate finance policies

  • Learning outcome

    Learning outcome

    After completing this course, students shall know

    • the difference between various trading platforms such as limit order markets, dark pools, over-the-counter markets, and call auctions. 
    • how trading and arbitrage affect price discovery.
    • how real world markets operate in the formation of market prices and price discovery.
    • how market liquidity and market prices are related to trading frictions such as asymmetric information, inventory holding costs, and direct trading costs.
    • how asset allocation is affected by trading costs and illiquidity, and how to account for illiquidity and transactions costs in portfolio management.
    • the difference between market orders and limit orders and how traders choose between these.
    • costs and benefits of market fragmentation and how these relates to liquidity externalities.
    • the difference between market efficiency and real efficiency and how market prices affect corporate investment decisions.
    • why illiquidity and liquidity risk affect security prices and returns.
    • how funding liquidity impacts market liquidity.

    In terms of skills and general competence, students shall 

    • be able to assess the quality of financial markets 
    • understand the impact and importance of regulating financial markets
    • understand the effect of government regulation of financial markets such as the newly implemented MiFID II directive  

  • Teaching

    Teaching

    The topics will be taught through lectures. Student participation is strongly encouraged.

  • Recommended prerequisites

    Recommended prerequisites

    Students are expected to have basic knowledge in finance as covered in courses such as FIE 400 Investments and FIE 402 Corporate Finance.

  • Requirements for course approval

    Requirements for course approval

    Students must get approved three out of three assignments. The assignments may be done in groups of up to five members, and is handed in one for each group.

  • Assessment

    Assessment

    Written School exam (4 hours): 100%

  • Grading Scale

    Grading Scale

    Grading scale A - F

  • Semester

    Semester

    Autumn. Not offered Autumn 2018

  • Literature

    Literature

    Market Liquidity. Theory, Evidence, and Policy by Thierry Foucault, Marco Pagano, and Ailsa Röell, Oxford University Press

    Additional readings may be assigned

Overview

ECTS Credits
7.5
Teaching language
English
Semester
Autumn

Course responsible

Professor Tore Leite, Department of Finance, NHH