Market Microstructure

Transcription

1 Market Microstructure module 2, Professor: Anna A. Obizhaeva New Economic School Course information Course Website: my.nes.ru Instructor s Office Hours: Class Time: Room Number: TAs: [Names and contact information] Course description Class will consist of a mixture of lectures and discussions of problem sets. We will cover theory and empirical evidence. There will be an emphasis the most recent developments in the field of market microstructure. We will also discuss many public policy implications and ideas for future research. Course requirements, grading, and attendance policies Most grading will be based on the final exam and an empirical project. There will be several homework assignments, which will be somewhat similar to articles assigned for each class. Some questions from the assignments will be discussed in class; students should read assigned materials and try to do assigned problems before each class, improve the problems attempted after the discussion in class, and turn in the assignments clearly written up and correctly. Solutions for problem sets have to be written up in a professional manner, mimicking the approach that would be used to write a journal article. Lecture attendance is mandatory for getting a passing grade. Academic integrity policy Cheating, plagiarism, and any other violations of academic ethics at NES are not tolerated.

2 Course contents I. Trading as a game: The history and logic of trading, market making Trading, clearing, settlement Exchanges as collusive cartels with fixed commission. Dealers market: Treynor model of bid-ask spread II. Perfect Competition - Inventory models and rational expectations models: Grossman-Miller (1988) model Grossman-Stiglitz (1980) model III. Imperfect competition: Kyle (1985) model IV. Market Microstructure Invariance: Kyle-Obizhaeva (2014) Empirical market microstructure Liquidity measures V. High-Frequency Trading: Strategies of HFTs Flash Crash of May 6, 2010 CFTC scandal VPIN dispute Sarao s case VI. Microstructure of Russian Currency Market: Currency crisis of December 2014 VII. Price Manipulation Economics behind fixing, LIBOR and WMR manipulations Cash settlement Corners and squeezes: Silver crisis of 1981, VW squeeze in 2008 VIII. Public Policy Issues: Fragmentation/internalization; market transparency Optimal tick size Short sales constraints VWAP trading sunshine trading versus front-running

3 Sample tasks for course evaluation The problem sets will be similar to articles assigned for each class. Other examples may include exercises from the textbook of Foucault, Pagano, and Roell. Market Liquidity: Theory, Evidence, and Policy. Course materials Required textbooks and materials For each topic, there will typically be several assigned papers. An asterisk denotes a paper of special focus; students are encouraged to read those papers before the class. Other papers can be skimmed through after the class. All materials can be found on-line or on my.nes.ru. Several textbooks are recommended at the end of this syllabus. Trading as a Game * Jack Treynor. The only game in town. Financial Analysts Journal, 51(1):81 83, Reprint of W. Bagehot. The only game in town. Financial Analysts Journal, 27(2):12 22, Treynor used pseudonym Walter Bagehot in original version. Walter Bagehot is the author of Walter Bagehot. Lombard Street: a description of the money market. Project Gutenberg Etext,1878. * Fischer Black. Noise. The Journal of Finance, 41(3): , Christie, W. G. and Schultz, P. H., Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?. The Journal of Finance, 49: , Hans R Stoll, The pricing of security dealer services: An empirical study of Nasdaq stocks, The Journal of Finance, 33(4), , Ben Bernanke, Clearing and Settlement during the Crash, The Review of Financial Markets 90 (3), , Perfect Competition - Inventory Models and Rational Expectation Models Sanford J. Grossman and Merton H. Miller. Liquidity and market structure. The Journal of Finance, 43(3): , * John F. Muth. Rational expectations and the theory of price movements. Econometrica, 29(3): , 1961.

4 Sanford J. Grossman and Joseph E. Stiglitz. On the impossibility of informationally efficient markets. The American Economic Review, 70(3): , * Stephen F. LeRoy, Efficient capital markets and martingales, The Journal of Economic Literature, 27(4), , Imperfect Competition * Albert S. Kyle. Continuous auctions and insider trading. Econometrica, 53(6): , Albert S. Kyle. Informed speculation with imperfect competition. The Review of Economic Studies, 56(3): , Holden Craig, Stacey Jacobsen, and Avinadhar Subrahmanyam, The Empirical Analysis of Liquidity, Working Paper, Market Microstructure Invariance * Albert S. Kyle and Anna A. Obizhaeva, Market microstructure invariance: Theory and empirical tests, Working Paper, * Hans R Stoll, Presidential address: Frictions, The Journal of Finance, 33(4), , * Perold, Andre F. Shortfall: Paper versus Reality. Journal of Portfolio Management, 14(3): 4-9, Yakov Y. Amihud, Illiquidity and stock returns: cross-section and time-series effects, The Journal of Financial Markets, 5, 31-56, High-Frequency Trading and Flash Crash of May 6, 2010 * Report of the staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues, Findings Regarding the Markets Events of May 6, 2010, September 30, 2010 * Andrei A. Kirilenko, Albert S. Kyle, Mehrdad Samadi, and Tuzun, Tugkan, The Flash Crash: the impact of high frequency trading on an electronic market, Working Paper, * Lawrence Harris, What to do about high-frequency trading? Financial Analysts Journal CFTC Response to Allegations Pertaining to the Office of Chief Economist, February Eric Budish, Peter Cramton, and John Shim, The high-frequency trading arms race: Frequent batch auctions as a market design response, Working Paper, Kerry Back, Kevin Crotty, and Tao Li, Estimating the Order-Flow Component of Security Returns, Working Paper, 2014

5 Andersen Torben and Oleg Bondarenko, VPIN and flash crash, Journal of Financial Marekts,2014. Andersen Torben and Oleg Bondarenko, Reflecting on the VPIN dispute, Research letter, Microstructure of Russian Currency Market * Анна Обижаева, Анализ событий на российском валютном рынке декабря 2014 года * Геннадий Пифтанкин, Микроструктура российского валютного рынка и валютный кризис в декабре 2014 года Price Manipulation and Cash Settlement * Albert S. Kyle and S. Viswanathan, How to define illegal price manipulation? American Economic Review Papers and Proceedings, 98 (2), , Albert S. Kyle, Cash settlement, price manipulation, and the Modigliani-Miller Theorem, Working Paper, Martin D. Evans, Forex Trading and the WMR Fix, April 2014, Working paper Markus K. Brunnermeier and Lasse Heje Pedersen. Predatory trading. The Journal of Finance, 60(4): , Praveen Kumar and Duane J. Seppi. Futures manipulation with cash settlement. The Journal of Finance, 47(4): , Public Policy Issues Angel, James, Lawrence Harris, Chester Spatt, Equity trading in the 21 st century Ananth Madhavan. VWAP Strategies Additional materials - Textbooks Larry Harris. Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press, USA, This book contains a wealth of institutional details, descriptions of issues, and discussion of microstructure at the level of an advanced layman.

6 Thierry Foucault, Marco Pagano, and Ailsa Roell. Market Liquidity: Theory, Evidence, and Policy. Oxford University Press, This book is a good graduate level book. Joel Hasbrouck. Empirical Market Microstructure: The Institutions Economics, and Econometrics of Securities Trading. Oxford University Press, This text is good graduate level book on empirical market microstructure. Joel Hasbrouck has an earlier, more extensive version of this book on his webpage.