Tentative Course Outline. MFIN7018: Special Topics in Finance: Market Microstructure

Transcription

1 Tentative Course Outline THE UNIVERSITY OF HONG KONG SCHOOL OF BUSINESS MFIN7018: Special Topics in Finance: Market Microstructure Module 6 ( ) Instructor: Dr. Kam-Ming WAN Phone number: Office: 1111, K.K.Leung Office hours: TBA kmwan@econ.hku.hk Course webpage: TBA Class Time: Tue. 6:30-9:30p.m. (B8) & Thu. 6:30-9:30p.m. (B2) Course Objectives The objective of this course is to help students to understand the trading mechanisms in financial markets: the institutions and the economic principles underlying the institutions. Specifically, this course covers the trading mechanisms of some of the most important institutions in the world, e.g., the New York Stock Exchange, Nasdaq, Chicago Mercantile Exchange, and Electronic Communication Networks. This course also aims to improve students knowledge on how to measure trading costs and strategic interaction among traders. As many market microstructure issues are evolving and have important policy implications, this course also include contemporary issues on market microstructure. Course Prerequisite Introductory econometrics and intermediate microeconomics are prerequisites for this course. You are also expected to have good knowledge on mathematics and statistics. In terms of mathematical skills, good knowledge on calculus and dynamic programming are useful. In terms of statistics, solid understanding on probability distributions, Bayes rule, and regression models are necessary. Basic understanding of game theory and asset pricing theory are useful. Textbook Empirical Market Microstructure by Joel Hasbrouck, 1 st Edition, Oxford University Press,

2 Additional References Experiments with Economic Principles: Microeconomics by Theodore C. Bergstrom and John H. Miller, 2 nd Edition, McGraw Hill, Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris, 1 st edition, Oxford University Press, Market Microstructure Theory by O Hara, Maureen, 1 st edition, Blackwell, Time Series Analysis by Hamilton, James D., 1 st edition, Princeton University Press, New Jersey, The Econometrics of Financial Markets by Campbell, John, Lo Andrew, and Mackinlay Craig, 1 st edition, Princeton University Press, New Jersey, Probability and Statistics by DeGroot, Morris, 3 rd edition, Addison-Wesley, Boston, Assessment Your grade will be based on your performance on examinations, class and tutorial attendance and participation. The weights are given below: Final Examination 40% Mid-term Exam 30% In-class Activities 20% Class Attendance and Participation 10% Total 100% Exams (70%) There are one midterm exam and a final exam. All exams are closed-book exams. No makeup exams will be given. Grades will be curved based on the weighted average scores. Request for regrading must be in written form. I will re-grade the entire exam upon receiving your written regrading request. I expect that all the work will be done in complete observance of the University s Honor Code. In-class Activities (20%) I will conduct several in-class games. Participation of these games is required and I ll take attendance. Students must read the required handouts prior to the in-class activities. These games are structured trading exercises in which you will be playing against each other. The main purpose is to simulate the trading situations in real markets and give you an opportunity to try out different trading strategies. 2

3 Class Attendance and participation (10%) Attendance will be taken randomly during the course. The attendance and individual sharing in class will be considered in assigning points for attendance and individual participation. You are required to read the assigned readings prior to each lecture. To facilitate in-class participation, you are required to hand in the individual sign-up sheet (see last page of the course outline) before the end of the second lecture week. Academic and Class Conduct Plagiarism and copying of copyright materials are serious offences and may lead to disciplinary actions. You should read the chapters on and Plagiarism and Copyright in the Undergraduate/Postgraduate Handbook for details. You are strongly advised to read the booklet entitled What is Plagiarism? which was distributed to you upon your admission into the University, a copy of which can be found at A booklet entitled Plagiarism and How to Avoid it is also available from the Main Library. The use of all electronic devices, including computers, mobile phones and games is strictly prohibited. Attendance is mandatory. If you miss a class or a tutorial, you will be responsible for the materials covered that day. I strongly discourage entering/leaving the classroom during the class because it distracts other students. My experience tells me that missing classes on a regular basis will put you in a disadvantageous position because not all class materials are covered in the textbook. I expect you to seek help from me in a timely way if you do not understand the course content and analysis. It would be hard to try to understand everything a few days before the exams. To comply with the sanitation policy, eating and drinking are prohibited in the classroom. 3

4 Course Schedule Special Topics in Finance: Market Microstructure Lecture (Meeting Date) Lecture 1 May 20 Lecture 2 May 22 Lecture 3 May 27 Lecture 4 May 29 Lecture 5 Jun 3 Lecture 6 Jun 5 Lecture 7 Jun 10 Lecture 8 Jun 12 Lecture 9 Jun 17 Lecture 10 Jun 19 Lecture 11 Jun 24 Lecture 12 Jun 26 Lecturing Topic Introduction Limit and Market Orders Review of Statistics Bargaining Auctions Batch Market Continuous Security Market Floor (pit) Markets CME NYSE Limit Order Book Midterm Exam Sequential Trade Model Inventory Management Strategic Trader Model Nasdaq Nasdaq Collusion Puzzle Liquidity Transaction Cost measurement Activities Bargaining in-class game Auction in-class game Batch-market in-class game July 5 (1:30-3:30pm) Final Exam 4

5 COURSE OUTLINE Topic 1 - Introduction Market Structure, Market and Limit Order *Hasbrouck, Chapter 1 *Madhavan, A., 2000, Market Microstructure: A Survey, Journal of Financial Markets 3, *Hasbrouck Joel, 2004, US Equity Markets: Overview and Recent History, NYU Working Paper. Topic 2 Bargaining Model Bargaining Model, Ultimatum Game *Hasbrouck, Chapter 2 *Bergstrom and Miller, Experiment 14 ( Deals for wheels ) *Thaler, Richard H., 1988a, Anomalies: the ultimatum game, Journal of Economic Perspectives 2, *Camerer, Colin, and Richard H. Thaler, 1995, Anomalies: ultimatums, dictators and manners, Journal of Economic Perspectives 9, Rubinstein, Ariel, 1982, Perfect equilibrium in a bargaining model, Econometrica 50, Topic 3 Auctions Auction design, Winner Curse *Bergstrom and Miller, Ch. 13 *Klemperer, Paul, 1999, Auction theory: a guide to the literature, Journal of Economic Surveys 13, *Klemperer, Paul, 2002, What really matters in auction design, Journal of Economic Perspectives 16,

6 *Thaler, Richard H., 1988b, Anomalies: the winner's curse, Journal of Economic Perspectives 2, Laffont, Jean-Jaques, 1997, Game theory and empirical economics: the case of auction data, European Economic Review 41, Topic 4 Batch Market Batch Market, London Bullion Market, SuperMontage *Bergstrom and Miller, Ch. 1 (A market for apples) *Harris, Ch. 6 Topic 5 Continuous Market Floor (pit) market, Chicago Mercantile Exchange (CME) *Harris, Ch. 6 *Excerpts from CME rule book *Summary on Marking the Close case Topic 6 The New York Stock Exchange Specialists and Limit order book *Hasbrouck, Chapter 12 *Demsetz Harold, 1968, The Cost of Transacting, Quarterly Journal of Economics 82, *Hasbrouck Joel, Sofianos George, and Sosebee Deborah, 1993, New York Stock Exchange Systems and Trading Procedures, NYSE Working Paper# Topic 7 Sequential Trade Models Determinant of bid-ask spread, Adverse Selection, Trade Size *Hasbrouck, Chapter 5 6

7 *Glosten, Lawrence, Paul Milgrom, 1985, Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders, Journal of Financial Economics 16, *Easley D, O Hara M, 1987, Price, Trade Size, and Information in Securities Markets, Journal of Financial Economics 19, O Hara, Chapter 3 Topic 8 - Inventory Management Dealer Inventory, Inventory Holding Costs, FX Dealer Inventory *Hasbrouck, Chapter 11 *Hasbrouck Joel, and George Sofianos, 1993, The Trades of Market Makers: An Empirical Analysis of NYSE Specialists, Journal of Finance 48, *Lyon Richard, 1998, Profits and Position Control: a Week of FX Dealing, Journal of International Money and Finance, 17(1), *Stoll Hans, 1978, The Supply of Dealer Services in Securities Markets, Journal of Finance 33, Amihud, Yakov, and Haim Mendelson, 1980, Dealership Market: Market-Making with Inventory, Journal of Financial Economics 8, Hasbrouck Joel, 1988, Trades, Quotes, Inventories and Information, Journal of Financial Economics 22, Topic 9 Strategic Trade Model Continuous Auction Model *Hasbrouck, Chapter 7 *Kyle, Albert S., 1985, Continuous Auctions and Insider Trading, Econometrica 53, *Holden, C.W., and A. Subrahmanya, 1992, Long-lived Private Information and Imperfect Competition, Journal of Finance 47,

8 Subrahmanyam, Avanidhar, 1991, Risk Aversion, Market Liquidity, and Price Efficiency, Review of Financial Studies 4(3), Topic 10 Nasdaq Nasdaq, Nasdaq Collusion Puzzle, Clustering, and SEC Reform *Christie and Schultz, 1994, Why do NASDAQ Market Makers Avoid Odd Eights?, Journal of Finance, *Barclay, M.., Christie W. G., Harris J.H., Kandel E., and Schultz P.H, 1999, Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks, Journal of Finance 54, *Christie, G. William, Harris J.H., and Schultz P.H., 1994, Why Did Nasdaq Market Makers Stop Avoding Odd-Eight Quotes," Journal of Finance 49, Jeffrey W. Smith, James P. Selway III, and Timothy McCormick, 1998, The Nasdaq Stock Market: Historical Background and Current Operation, NASD Working Paper# Demsetz H., 1997, Limit Orders and the Alleged Nasdaq Collusion, Journal of Financial Economics 45 (1) Weston, James, 2000, Competition on the Nasdaq and the Impact of Recent Market Reforms, Journal of Finance 55, Topic 11 Liquidity and Trading Cost Measurement Quoted Spread, Effective Spread, Perold Implementation Shortfall, Block Trade *Hasbrouck, Ch. 3, 8, and 14 *Roll Richard, 1984, A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market, Journal of Finance 39, *Glosten, Lawrence, L. Harris, 1988, Estimating the Component of the Bid-Ask Spread, Journal of Financial Economics 21,

9 University of Hong Kong School of Business Individual Sign-up Sheet MFIN Second Semester Dr. Kam-Ming WAN In order for me to better organize the course, and to adapt the materials to your background, would you please tell me more about yourself? Name: Address: Nationality: Current Employer and Position: Your Academic Background Finance courses: Statistics and math courses: Economics and related courses: Work Experience (less than 150 words, or write a short introduction about yourself) Picture [Please affix a RECENT photo here] 9