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Market Microstructure

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Market Microstructure

This course is part of multiple programs.

Instructor: Marco Pagano

3,770 already enrolled

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6 modules

Gain insight into a topic and learn the fundamentals.

Intermediate level

Recommended experience

2 weeks to complete

at 10 hours a week

Flexible schedule

Learn at your own pace

6 modules

Gain insight into a topic and learn the fundamentals.

Intermediate level

Recommended experience

2 weeks to complete

at 10 hours a week

Flexible schedule

Learn at your own pace

What you'll learn

security market; trading; market liquidity and funding liquidity

Skills you'll gain

Details to know

Shareable certificate

Add to your LinkedIn profile

Assessments

21 assignments

Taught in English

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There are 6 modules in this course

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.

Module details

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

What's included

21 videos5 readings3 assignments

21 videosTotal 77 minutes

Introduction2 minutes
Perfect vs. real-world financial markets2 minutes
Liquidity4 minutes
Price discovery4 minutes
Why should we care?3 minutes
Market microstructure and empirical puzzles3 minutes
Policy Issues4 minutes
Where does trading occur?3 minutes
Who trades securities?2 minutes
The life-cycle of an order2 minutes
The two basic trading mechanisms: limit order and dealer markets1 minute
Limit order markets: how do they work?8 minutes
Dealer markets: how do they work?6 minutes
Many real-world markets are dual or hybrid3 minutes
Dimensions in which market platforms differ1 minute
Market transparency2 minutes
Frequency of trading1 minute
Interplay of public regulation and self-regulation5 minutes
Role of competition between market platforms in shaping their design5 minutes
Effect of changes in regulation on competition between platforms6 minutes
Effect of changes in technology on trading strategies and competition between platforms9 minutes

5 readingsTotal 51 minutes

What is market microstructure?15 minutes
Basics of security trading3 minutes
Market mechanisms15 minutes
Who sets the rules?15 minutes
Key takeaways3 minutes

3 assignmentsTotal 50 minutes

Basics30 minutes
Why should we care?10 minutes
Limit order market10 minutes

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.

What's included

22 videos7 readings6 assignments

22 videosTotal 60 minutes

Explicit and implicit trading costs3 minutes
Breaking down implicit trading costs2 minutes
Data requirements of implicit trading cost measures2 minutes
Quoted spread3 minutes
Effective spread5 minutes
Realized spread4 minutes
Value-Weighted Average Price (VWAP)3 minutes
Price Impact2 minutes
Example of estimates of price impact1 minute
Amihud Illiquidity Ratio2 minutes
Other volume-based measures4 minutes
Definition and rationale of Roll's measure2 minutes
Assumptions and derivation of Roll's measure4 minutes
Possible biases in Roll's measure1 minute
Bias in Roll's measure due to unbalanced order flow2 minutes
Bias in Roll's measure due to autocorrelated order flow2 minutes
Bias in Roll's measure if the order flow is informative1 minute
Bias in Roll's measure if there is a trend in expected returns2 minutes
Empirical performance of Roll's measure2 minutes
Time dimension of liquidity3 minutes
Implementation shortfall4 minutes
Intuitive meaning5 minutes

7 readingsTotal 41 minutes

Explicit and implicit trading costs2 minutes
Quoted spread3 minutes
Spread: based measures10 minutes
Measure based on order flow and volume data5 minutes
Roll's measure15 minutes
Time dimension of liquidity5 minutes
Key takeaways1 minute

6 assignmentsTotal 48 minutes

Measuring Liquidity30 minutes
Quoted spread5 minutes
Realized spread5 minutes
Price impact3 minutes
Assumptions and derivation of Roll's measure3 minutes
Implementation shortfall2 minutes

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.

What's included

16 videos4 readings4 assignments

16 videosTotal 64 minutes

Real-world intraday price fluctuations3 minutes
Price formation in a frictionless world4 minutes
Real-world intraday price fluctuations2 minutes
The static Glosten-Milgrom model6 minutes
Learning from the order flow5 minutes
Derivation of the first ask in the trading day6 minutes
Derivation and properties of the bid-ask spread1 minute
Dynamics of quotes in the Glosten-Milgrom model5 minutes
Derivation and properties of the bid-ask spread at any time in the trading day6 minutes
Price dynamics in response to the order flow5 minutes
Belief dynamics and price dynamics2 minutes
Dual role of equilibrium bid and ask quotes2 minutes
Price discovery and informational efficiency8 minutes
Dynamics of squared pricing errors5 minutes
Tradeoff between speed of price discovery and market illiquidity1 minute
Return volatility2 minutes

4 readingsTotal 28 minutes

Price formation and order flow4 minutes
Prices with informative order flow: static model8 minutes
Prices with informative order flow: dynamic model15 minutes
Key takeaways1 minute

4 assignmentsTotal 55 minutes

Price Dynamics and Liquidity part 130 minutes
Prices with informative order flow10 minutes
Examples5 minutes
Price discovery and informational efficiency10 minutes

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.

What's included

16 videos5 readings3 assignments

16 videosTotal 55 minutes

Short term reversal in asset prices following an order2 minutes
Can informed trading account for such price reversals?2 minutes
Introduce order processing costs and inventory holding costs2 minutes
Bid-ask spread with order processing costs3 minutes
Price dynamics with order processing costs1 minute
Short-run price impact with order processing costs1 minute
Long-run price impact with order processing costs1 minute
Dealer rents or order processing costs?3 minutes
Prices and bid-ask spread with inventory holding costs5 minutes
Price pressure from the order flow10 minutes
Move to a dynamic model of prices with inventory holding costs3 minutes
Dynamic optimization by dealers8 minutes
Price dynamics with inventory holding costs1 minute
Inventory and price dynamics with inventory holding costs3 minutes
Testable implications of the dynamic inventory holding cost model6 minutes
Price dynamics if asymmetric information, order processing costs and inventory holding costs are all present5 minutes

5 readingsTotal 47 minutes

Mean reversion in prices after orders8 minutes
Prices and bid-ask spread in the presence of order processing costs8 minutes
Prices and bid-ask spread with inventory holding costs20 minutes
The full picture1 minute
Key takeaways10 minutes

3 assignmentsTotal 37 minutes

Price Dynamics and Liquidity part 230 minutes
Prices and bid-ask spread in the presence of order processing costs2 minutes
Prices and bid-ask spread with inventory holding costs5 minutes

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.

What's included

17 videos4 readings3 assignments

17 videosTotal 68 minutes

Societé Generale, January 20083 minutes
Depth vs. liquidity3 minutes
Assumptions of the Kyle model5 minutes
Steps in solving the model1 minute
First step: market makers' inference4 minutes
Second step: imposing market makers' zero-profit condition5 minutes
Third step: choice of the trade size by the informed investor3 minutes
Fourth step: Nash equilibrium6 minutes
Equilibrium market depth and expected profits of the insider7 minutes
Introducing imperfect competition in the Kyle model4 minutes
Market depth with imperfect competition in the Kyle model4 minutes
Optimization by competitive and risk-averse market makers7 minutes
Equilibrium price with competitive and risk-averse market makers2 minutes
Depth with competitive and risk-averse market makers4 minutes
Introducing imperfect competition in the model4 minutes
Depth with imperfectly competitive and risk-averse market makers2 minutes
Risk sharing with perfectly and imperfectly competitive market makers3 minutes

4 readingsTotal 38 minutes

Impact of trade size on prices2 minutes
Market depth in call markets with asymmetric information25 minutes
Market depth in call markets with risk averse dealers10 minutes
Key takeaways1 minute

3 assignmentsTotal 51 minutes

Trade side and Market Depth30 minutes
Market depth in call markets with asymmetric information6 minutes
Risk sharing with perfectly and imperfectly competitive market makers15 minutes

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.