FE570 Market Microstructure and Trading Strategies
Course Catalog Description
Prerequisites: Basic concepts of markets, some knowledge of statistics (factor analysis, PCA), probability distributions and time series analysis. Good practical knowledge of a programming language: Python or R.
This course offers an overview of the modern financial markets for securities, focusing on equities, but covering also bond markets, and of the main types of traders and order types. The course will introduce market microstructure models used for describing price for-mation: zero intelligence models, sequential and information-based models, and limit-order book models.
The course will introduce several popular trading strategies: trend, momentum and oscilla-tor-based strategies, arbitrage trading strategies, as well as methods for estimating and back-testing the strategies.
Students will be required to learn the basics of the R statistical computing language, and to be able to analyze financial data using the models introduced in this course. Students will also use Python to run trading strategies in the SHIFT system.
Relationship of Course to Rest of Curriculum
The course is one of the courses required for the Algorithmic Trading certificate in Financial Engineering (FE).
- The course will give an introduction to the financial markets, trading and limit or-der book.
- The course will introduce and define the concept of liquidity in financial markets, and models for liquidity of financial markets.
- The course will introduce the basic empirical facts of the market microstructure, and models of market microstructure: Roll model of trade prices, inventory mod-els, and information-based models.
- The course will introduce the main types of trading strategies: technical, arbitrage and HFT strategies.
The course will consist of lectures, in-class exercises, homework, a project and a mid-term exam.
- Larry Harris, Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press 2002
- Anatoly B. Schmidt, Financial Markets and Trading: An Introduction to Market Micro-structure and Trading Strategies, Wiley, 2010
- Joel Hasbrouck, Empirical Market Microstructure, Oxford University Press, 2007
Sections from the required text, as indicated for each class.
Selected chapters from these books are provided in Canvas:
- J.P. Bouchaud, J. Bonart, J. Donier and M. Gould, Trades, Quotes and Prices: Financial Markets under the Microscope, Cambridge University Press, 2018
- T. Foucault, M. Pagano and A. Roell - Market Liquidity - Theory, Evidence and Policy, 2013
Additional readings will be provided, as needed.
Participation/Class challenges: 10%
Midterm exam: 30%
Total Grade: 100%
Assignments: Assignments will be provided throughout the semester, consisting of problems related to the material taught in the lectures. They are to be handed in on time. No late assignments, without prior approval, will be accepted. There is a project for the course, and a mid-term exam. The total grade is a weighted average of the attendance/participation, assignments, mid-term exam and project.
|| Score Range
This grading scheme is subject to change based on student outcomes.
It may be curved
more leniently. It will not
be made more difficult.
||Introduction to Financial Markets
||Harris [1, 3]
| Week 2
||Modern Financial Markets and Trading Mechanism
||Hasbrouch [1,2], FPR 
| Week 3
||Orders, Trades and Data
||Harris [4, 6, 7]
| Week 4
||Empirical Properties of The Micro-structure Data and Liquidity
||Harris [19, 20], FPR 
| Week 5
||The Roll Model of Trade Prices
| Week 6
||Volatility: Estimation and Forecasting
||Reading will be provided
| Week 7
||Market Microstructure Models I: Zero Intelligence Models
||Reading will be provided
| Week 8
| Week 9
||Market Microstructure Models II: Se-quential and Information-based Mod-els
| Week 10
||Market Microstructure Models III: Strategic and Inventory Models
| Week 11
||Market Microstructure Models IV: Limit Order Markets
||Hasbrouck [12, 13]
| Week 12
||Optimal Order Execution
||Schmidt [12, 13]
| Week 13
||Arbitrage Trading Strategies
| Week 14
| Week 15
2020 Fall FE570 Market Microstructure and Trading Strategies