2020 Fall FE570 Market Microstructure and Trading Strategies
Course Catalog Description
This course offers an overview of modern financial markets for various securities(equities, derivatives, FX, and
fixed income), different types of traders, orders, and market structures, market micro-structure models used for
describing price formation in for the various markets including inventory models and information-based models and
models of limit-order markets. It also introduces several typical trading strategies including trend,momentum, and
oscillator-based strategies, arbitrage trading strategies, as well as the methods of deriving and back-testing these
trading strategies. Students are required to learn the basics of R statistical computing language, and be able to
analyze financial data using the models learned from this course.
After taking this course, the student will be able to:
- Form a broad understanding of how various markets work and how securities are traded.
- Develop a firm understanding the mechanics of market microstructure and price discovery.
- determine the differentials of functions of stochastic processes
- Formulate and back-test various trading strategies.
- Be able to analyze market data and discover market patterns using R package.
- [Required:] Joel Hasbrouck, Empirical Market Microstructure, Oxford University Press, 2007
- [Optional:] Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners, Oxford University
- [Required:] Anatoly B. Schmidt, Financial Markets and Trading: An Introduction to Market Microstructure and
Trading Strategies, John Wiley & Sons, Inc., Hoboken, New Jersey.
Midterm exam: 30%;
Final Exam: 30%;
Exams: Two Exams. (Mid-term) EXAM I: March 13 - (Tues). (Final) EXAM II: May 15 - (Tues). These exams will
consist of short questions, and data analysis using R.
Attendance will be taken randomly
(e.g., 6-7 times during the semester) and will determine "which direction" the resulting grade will “fall”,
for those grades which are borderline (e.g., between B+ or A-).
Exam Honor Policy: You are not allowed to discuss any of the exam questions with one another or to show
any of your solutions. The work must be done independently and pledged.
Homework: There will be 4 homework assignments (approximately every 2-3 weeks).
Homework Honor Policy: You are allowed to discuss the problems between yourselves, but once you begin
writing up your solution, you must do so independently, and cannot show one another any parts of your written
solutions. The HW is to be pledged (that it adheres to this).
||Introduction to Financial Markets
||L. Harris [1, 3]
| Week 2
||Modern Financial Markets and Trading Mechanism
||J. Hasbrouch [1,2], L.Harris [4, 5]
| Week 3
||Orders, Market Structure and Brokers
||L.Harris [6, 7], J. Hasbrouck 
| Week 4
||Liquidity, Volatility, and Regulation
||L.Harris [18, 19]
| Week 5
||The Roll Model of Trade Prices
||J. Hasbrouck 
| Week 6
||Index and Portfolio Markets
||Harris [23, 24]
| Week 7
||L. Harris [19, 20], A.Schmidt
| Week 8
||Market Microstructure: Information-based Models
||L. Harris [24, 25], A.Schmidt
| Week 9
||Empirical Market Microstructure
||J. Hasbrouck [5,6]
| Week 10
| Week 11
||Technical Trading Strategies
| Week 12
||Arbitrage Trading Strategies
| Week 13
||Optimal Order Execution
| Week 14