Welcome to Market Microstructure at Peking University HSBC Business School! For simplicity, most finance courses assume that securities trade in an idealized costless, frictionless world. In reality there are many frictions: bid-ask spreads, trade impact on price, brokerage commissions, quantity limitations, time delays, etc. This field of study is known as “market microstructure.” Microstructure has grown rapidly into one of the largest subdisciplines of finance and has had a profound impact on the real world. For example, one research study uncovered evidence of implicit collusion by NASDAQ dealers. This led to a class action lawsuit that was eventually settled when 30 brokerage firms paid a total of $1 billion in damages!

 

 

My approach to teaching involves four key features:

 

1.       Assignment Preparation. Students are expected to read the assigned readings in advance and come to class ready to discuss them.

 

2.       Class Participation. Students are expected to play a primary role in explaining the assigned readings, expressing their opinions, asking questions, and contributing to the class discussion. This “active learning” approach is student-centered, as opposed to professor-centered (where the professor simply lectures). I will frequently ask for voluntary contributions. I will frequently cold call on students to insure that everyone participates. Each time that I call on you, either as a volunteer or as a cold call, will count towards your class participation score. Attendance does not count.

 

3.       Projects. Students are expected to submit assigned projects on time. No late submissions are allowed. Also, the projects are meant to be an individual project. No credits will be awarded for projects that are done together with other classmates.

 

4.       In-class Exercises. There will be several in-class exercises which will be graded. Not participating in the in-class exercises will be penalized.

 

 

 

(1.) 9/10, Introduction and the trading industry

·         Harris, Pages 11-19

·         PowerPoint: Lecture 01

·         Excel: NBBO Example

 

·         Discuss the TAQ Project

·         PowerPoint: Lecture 02

 

·         Submit TAQ project

·         Jain #1, pages 2955, 2966, 2983

·         Jain #2, pages 40-43

·         PowerPoint: Lecture 03

·         Review of Unit I

 

 

(4.) 9/20, Transaction cost measurement

·          Five Transaction Cost Measurement Methods

·         Credit Suisse, pages 1-11

·          Hasbrouck and Saar, pages 1-4, 40-41, 48-55

·         PowerPoint: Lecture 04

·         Excel: Five Transaction Cost Measurement Methods

 

·         PowerPoint: Lecture 05

·         Excel: LOB and Call Markets

·         Angel, Harris, and Spatt, pages 1-20

·         Hendershott and Moulton, pages 568-577, 581-582, 583

·         Hendershott, Jones, and Menkveld, pages 1-4, 8-10, 12, 20-21

 

·         Angel, Harris, and Spatt, pages 20-53

·         “Price of Liquidity,” Traders Magazine

·         Video: Risky Business: The Day Traders

·         Discussion of  Risky Business: The Day Traders

·         “What it takes to trade,” CNN Money

·         “What the regulators say,” CNN Money

·         “Day trader decries new rule,” CNN Money

·         NASAA Report, pages 1, 9-13, 44-46

·         “Gambling Man,” Wall Street Journal Article

·         Barber and Odean, pages 773-776

·         PowerPoint: Lecture 06

·         Review of Unit 2

 

 

·         Video: Next: The Future Just Happened

·         Discussion of Next: The Future Just Happened

·         Lebed Posting

·         Bhattacharya, Daouk, Jorgenson, and Kehr (2000), pages 69-70,73-74, 82-83, 93

·         Bhattacharya and Daouk, pages 75, 80-84, 89, 92-93

·         Excel: Specialist Strategies

·         PowerPoint: Lecture 07

 

·         Video: Floored

·         Discussion of Floored

·         Harris, Hillary Clinton’s Futures Trading Profits

·         Clinton, Living History, pages 86-87

·         Harris, Lecture 13 Arbitrage, pages 1-5

·         Gagnon and Karolyi, page 60

·         Gatev, Goetzmann, and Rouwenhorst, pages 797-799, 803-804, 807, 809, 812, 817

·         Bowen, Hutchinson, and Sullivan, pages 31-35

·         PowerPoint: Lecture 09

·         Review for the mid-term

 

 

·         Easley, Kiefer, O'Hara and Paperman, pages 1405-1410, 1418, 1421

·         PIN Sampler (Vega; Agudelo; Easley, Engle, O’Hara, and Wu; Easley, de Prado, and O'Hara)

·         Excel: PIN Model Estimation, PIN Model Dynamics

·         PowerPoint: Lecture 11

 

 

·         Ofek & Richardson, pages 1113-1116, 1127-1128

·         Schultz, pages 351-352, 354, 358, 360, 370

·         "Nasty, brutish and short," The Economist

·         “Taxing the Speculators,” New York Times

·         "A Transaction Tax Would Hurt All Investors," Wall Street Journal

·         “EU proposes 0.1 percent financial transactions tax”

·         Beber and Pagano, pages 1-4, figures 1-7, tables 1-2, 4

·         Bessembinder, Maxwell, and Venkataraman, pages 251-254, 268-269

·         Edwards, Harris, and Piwowar, pages 1421-1423, 1437, 1441

·         Barber and Odean, pages 785-788, 797, 799-800, 802, 804

·         Barber, Lee, Liu, and Odean, pages 609-611, 614-615, 619, 621

·         PowerPoint: Lecture 12

 

 

·         “Stocks Plunge As Rescue Plan Fails To Gain House Approval,” Wall Street Journal

·         Roll, pages 19-26

·         Shiller, Irrational Exuberance, pages 82-95

·         “Repeating the 1920s?” Wall Street Journal

·         “Market at a Crossroads,” Wall Street Journal

·         “Time To Stand Tight,” Wall Street Journal

·         Joint Preliminary Report on the Flash Crash, pages 11-15, 35, 46, 51, 54

·         Joint Final Report on the Flash Crash, pages 1-8, 19-22, 24-26, 30, 33, 61, 88, 90, 94, 98, 100

·         PowerPoint: Lecture 13

 

·         Hanke and Hauser, pages 57-66, 76, 81-82

·         Bhattacharya, Holden, and Jacobsen, pages 1-3, 7-10, 14-15

·         Grinblatt and Keloharju, pages 549-556, 569, 574

·         PowerPoint: Lecture 14

 

 

·         Biais and Green, pages 3-7, 40-41, 43-46, 50-51

·         Mayhew, pages 931, 933-934, 948-949, 955

·         Battalio, Hatch, and Jennings, pages 933-936, 944-945, 948-949, 952-953, 955

·         PowerPoint: Lecture 15

 

·         Doidge, Karolyi, and Stulz, pages 253-259, 267

·         Moulton and Wei, pages 570-572, 575, 580, 587-588

·         Fernandes and Ferreira, pages 216-218, 231-233

·         Kavajecz and Keim, pages 465-472, 478, 480, 487

·         Boehmer, Saar, and Yu, pages 783-787, 791, 793, 795, 801-802, 805-806

·         Barclay and Hendershott #1, pages 1041, 1044-1045, 1047-1048, 1053

·         Barclay and Hendershott #2, page 689

·         PowerPoint: Lecture 16

 

·         Powerpoint: Lecture 17

 

·         Review

 

 

·         A collection of selected academic and practitioner readings can be downloaded as a PDF file from course website.

 

 

Grading is done on a relative (not absolute) basis. The course grade is based on:

 

 POLICIES

 

1.       In the first two class sessions we will be evolving towards permanent seats with due consideration for the usual course adds and drops. In class 3, I will ask you to sign-up for a permanent seat for the rest of the semester. Permanent seats assist me quite a bit in associating faces and names.

 

2.       Students are expected to be ready for class at the scheduled time. Classes will start class on time and late arrivals will be frowned on. There will be a 10-minute break after 50 minutes into the lecture. The latter half will also last for about 50 minutes.