Trading and Markets, B40.3349, Spring 2004
Last updated on
Wednesday, November 8, 2006 10:37 AM
|
Professor Joel Hasbrouck |
Monday
evenings from 6-9pm, |
Grades will be turned in and emailed on Friday, May
21. I’ll send you an email directly. Paypal checks will be emailed
shortly thereafter. Thursday, May 20.
Quiz 3 (the final) will be partially cumulative: it will cover material after auctions (i.e., March 8 onwards). Sample problems that cover batch markets through Nasdaq are indicated in the "Quiz 2" announcement below. (These haven't changed from when they were first posted.) I have also prepared some sample problems for the last third of the course: download problems and answers for last third.
Quiz 2 will be 6 short verbal questions plus14 true-or-false questions. Most of the questions deal with specific trading procedures and situations. Monday, April 19
Quiz 2 will be on April 19, 6-7pm. We have a class speaker in the second-half of the session, so please try to be on time. The quiz covers batch markets through Nasdaq (Sections 3-11). It does not cover alternative trading systems. For some of the material, I’ve compiled problems (download problems and answers). Other material (e.g., “Dealer markets”) is more conceptual and lends itself to longer essay-type questions. I expect that the quiz will be mostly (at least two-thirds) short answer, dealing with trading procedures on the markets we’ve looked at in depth (Merc, Euronext, NYSE, Nasdaq).
For your stock analysis project, I've revised the data guide to incorporate CRSP (daily) stock data as well as the TAQ (intraday) data. The revised guide is Working with the WRDS (TAQ and CRSP) data; the revised spreadsheet is CGX02.xls. I’ve also sent an email with alternate company suggestions and other updates. April 6, 2004.
To help in your stock analysis project, I’ve written up a short guide to Working with the TAQ data and provided a sample spreadsheet CGX.xls. The TAQ data are available on the Wharton Research Data System (WRDS). You should have received an email with access instructions. I’ve also posted a copy of the TAQ User’s Guide.
The quiz 1 results have all been emailed. To each
person who took the quiz, I sent an email that contained your grade, you
(scanned and graded) quiz and the key. A small number of these emails were
returned due to problems with the recipients mailboxes. If you have not
received this email, then email me and we’ll try to figure out what went
wrong. March 13, 2004.
In class, someone asked me a question about common
value auctions. It went something like this: “Well, I can see that if
your estimate is much higher than you were expecting, you’d think that it
was an overestimate. But what if your
signal is very low? Wouldn’t you then think that it’s an underestimate of the true value?”
My answer was “Yup.” But on reflection, there’s a little more
to things. Even though I think it’s an underestimate, if I win then it is
still the highest of all the estimates. In other words, my low signal is still
an overestimate if I win. I put some
more material in the notes. Also, I found an error (a minor formula in section
2.7). Both of these changes are in corrections.
March 3, 2004
The auction results have been sent out. (Actually,
they were sent out twice, the first set being in error.) March 3, 2004
The first quiz will be next Monday, March 8.
I’ve sent out an email with some of the details. I sent the emails to
your “…@stern.nyu.edu” email address. If you did not receive
it, please email me to let me know. Bargaining and auction
problems with answers. March 1, 2004
SternBay Version 1.1 is now available. (I've added common value auctions.) This is a simulated auction exercise that illustrates the various auction formats. You will need the Macromedia Flash player plug-in for your browser. SternBay works with version 7 of the Flash player; I haven't tested it with version 6. February 26, 2004.
The reading packet is now available in the bookstore. February 9, 2004.
The Iowa Electronic Market is a fun place to visit. This is an electronic futures market that trades (among other things) contracts based on political outcomes. For example, one of the contracts pays off $1 if John Kerry is the Democratic Presidential nominee. The prices of these contracts tell you how market participants view the probabilities of the associated outcomes. The market is open to students. If you are interested in playing, visit the site and read all the pertinent warnings. You will be investing real money, all of which you might lose. January 25, 2004.
This course is fundamentally about
the operation, design and regulation of securities markets. However, since
securities markets involve bargaining, auctions and continuous markets, the
course will illuminate basic principles that are applicable to market
mechanisms for other sorts of goods and services.
The
course draws on material from
The quiz dates are firm; everything
else is tentative. In-class games do not count toward the grade. They are
marked on the schedule, but note that they are not the only thing that will be
covered on that day.
|
Session |
Dates (Mondays) |
Notes |
Video links |
Quizzes (in class) |
Material covered |
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1 |
9-Feb |
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Bargaining (Bargaining in-class game) |
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16-Feb |
Presidents Day |
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|
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2 |
23-Feb |
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Auctions (Auction in-class game) |
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3 |
1-Mar |
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|
Auctions |
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4 |
8-Mar |
|
Quiz on bargaining and auctions |
Batch markets |
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15-Mar |
Spring break |
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5 |
22-Mar |
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Floor (pit) markets |
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6 |
29-Mar |
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Electronic limit order book markets |
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7 |
5-Apr |
1st night of Passover |
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Euronext (Paris) |
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|
8 |
12-Apr |
7th night of Passover |
|
Nasdaq |
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9 |
19-Apr |
|
(No video available for quiz or Sofianos talk.) |
Quiz on trading rules and procedures (Batch markets through Nasdaq; sections 3-11 in the notes) |
Speaker: George Sofianos, Goldman Sachs |
|
10 |
26-Apr |
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April 26 Class (Video does not cover Jeff Benton's talk. His slides are available on the right.) |
|
Trading cost measurement |
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11 |
3-May |
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Transaction costs, consolidation, fragmentation; Rule 390 and Reg NMS |
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12 |
10-May |
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Final quiz (cumulative) |
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Note 1. The tape does not cover the last 30 minutes or so of the class. During that 30 minutes, I went over replays of actual securities auctions. These auctions were conducted by the Grant Street Group, who kindly gave me permission to show them in class, but not otherwise make them available. The auctions are very interesting to see, but we didn’t cover anything that will be on the quiz.
Materials
There is no text; the NYU Professional Bookstore
carries the reading packet. The reading packet is published by Xanedu: when you
buy the print copy, you also get electronic access. The packet does not include
all of the required readings.
Course requirements:
Three in-class quizzes (including the final, which will be cumulative)
A case analysis. This will involve analyzing the price reaction of a stock (which I’ll assign) to a news announcement.
Prerequisites
There are no formal prerequisites. However, some prior exposure to finance is useful because we'll be dealing primarily with securities markets. Microeconomics is useful because the notions of supply, demand and economic equilibrium underlie just about every trading situation. Statistics comes in when we need to design strategies in situations involving risk or evaluate the performance of existing markets.
Class sessions
You are responsible for knowing what goes on in class. In general, I distribute copies of class notes that cover the main points of the material, but not everything. I also post these notes to the web (this page). I’ll try to have the class sessions videotaped, but I can’t guarantee coverage or quality of the videos.
Communication
I’ll send important notifications via email. All messages will go to your Stern email address. If you want these messages to be routed elsewhere, you’ll need to set that up with Stern IT.
In-class games.
These are structured trading exercises in which you will be playing against each other (and sometimes me). The purpose of these games is to give you experience with trading situations and your own reactions to them. The games will give you the opportunity to try strategies that people use in real markets (bluffing, low-ball bids, etc.). You may also get the chance to try out strategies that would probably get you into trouble in the real world.
The payoffs of these games will be denominated in dollars. At the end of the semester, these “game dollars” will be converted into real dollars (cash, moolah, green stuff, etc.)
I’ll
be making payments via PayPal. To receive the payment, you must complete the
course, report your address and SSN (for NYU recordkeeping), and have a
At this point, I plan for the total payout pool for the class to be about $20 per student. (Your actual payment will depend on the outcomes of the games.)
Bergstrom and Miller, Experiment 14 (“Deals for wheels”)*; Thaler (1988a), Camerer and Thaler (1995), Kagel, Kim, and Moser (1996), Rubinstein (1982) ►Bibliography
Cybersettle, GovPX, LiquidNet all have bilateral negotiation facilities. The Cybersettle protocol is well-documented on the web site. The GovPX and LiquidNet protocols are not documented.
Bergstrom and Miller,
Supplemental: Much of what we know about auctions comes from field observation
and experiments. Laffont (1997) reports field observations.
US Treasury Securities; The Grant Street Group (formerly Muniauction) runs a large number of debt security auctions; W.R. Hambrecht's OpenIPO runs initial public offering auctions.
"A market for apples," Bergstrom and Miller (in packet); especially the “Discussion” on pp. 7-24.
FAQ on the fixing process
in the
Section XI in Summary of the SuperMontage system (Nasdaq (2004b))
London Bullion Market Association
Summary of “marking the close” cases
The CME website is excellent and thorough. Off the home page, the link sequence Education Getting started Basics of trading CME futures and options leads to a useful summary of the trading process. The entire official rule book is available on line.
For the US Treasury market: Dupont and Sack (1999), pp.785–791, esp. 787–790
Euronext Cash Markets Trading Manual (copy on my web site)
Island/Instinet is the dominant electronic communications network in US equities
Archipelago (now merged with the Pacific Stock Exchange) is the
The
Euronext markets (
Euronext Cash Markets Trading Manual (copy on my web site). This is a fairly concise description of the trading process.
Euronext Harmonized Market Rules (copy on my web site) is lengthier and more detailed than the Trading Manual.
Excerpts from the NYSE Floor Official Manual 2003. The material distributed in class supersedes the material in the reading packet.
The
SEC's recent settlement with the specialists involved specialists trading ahead
of public customers in the same direction and at the same price. A recent
The Nasdaq stock market: historical background and current operation (Smith, Selway, and McCormick (1998)) summarizes Nasdaq’s history. Read only sections 1 and 2 (through page 14). (Subsequent material is not generally current.)
About Nasdaq (Nasdaq (2004a)) is a good overview of the current market.
Summary of the SuperMontage System (Nasdaq (2004b)) describes the current operation of Nasdaq’s key system.
Nasd Notice to Members 03-74 (NASD (2004)) contains a summary of the Manning rules
SEC Order Handling Rules (Summary)
Nasd Notice to Members 99-99 (NASD (1999)) elaborates on the limit order display rule.
NASD is the website of the parent organization
NASD Regulation, Inc. (“NASD-R”) is the regulatory arm of NASD
www.nasdaq.com is the nasdaq investor site
www.nasdaqtrader.com contains more detail info on SuperMontage and Nasdaq’s other trading systems.
The U.S. SEC conducted an investigation into the collusion charges and released a "21a" report with appendices. The SEC administrative law decision.
SEC order handling rules (full text)
Summary of SEC’s “Reg ATS” (Section I.C of the final rule)
ITG, Inc.’s POSIT crossing is described in their POSIT Brochure.
The various Instinet crossings are described in their Crossing Brochure. Also, see their News Policy.
The new NYSE crossing sessions III and IV are not yet implemented nor are they well-documented. They are summarized in the excerpt from the Federal Document Register.
ITG, Inc. (operator of Posit and Triact)
Instinet (close and vwap crossing sessions)
Nyfix (operator of the Millenium ATS)
Perold (1988), “The information shortfall approach to trading costs” (in reading packet)
Introduction (Section I) to the SEC’s Final Rule … (see full text link below)
SEC’s Final Rule: Disclosure of Order Execution and Routing Practices (Rules 11Ac1-5 and -6) Full Text.
SEC’s Rule 390 Concept Release, sections IV.A and IV.C.2 only (see link below)
SEC’s Rule 390 Concept Release web pdf
Report of the [SEC] Advisory Committee On Market Information: A Blueprint For Responsible Change (“Seligman Commission”) Final report web page
On February 28 and February 29, 2000, the Senate Banking Committee held hearings on market structure. These hearings initiated a search for a consensus among Wall Street institutions. At one point it looked likely that we might have a consolidated limit order book (“CLOB”). This momentum died out as quickly as it seemed to have started.
The Reg NMS proposal is very long and complex. I’ve compiled a book-marked pdf copy. Read only the following sections:
I. Preliminary statement
II. Objectives for rule proposals
III.A Trade-through proposal (executive summary)
IV.B.1 and IV.B.2 Proposed access to bids and offers
V.A Sub-penny proposal (introduction); V.D Nasdaq’s proposal; V.F Discussion of the proposed rule.
VI.A Market data proposal (introduction)
On the SEC’s web site are: NMS proposal (web format) and comment letters
References / Online Bibliography
The following reference list contains live links to sources. For these
readings, you should download them to a single computer and/or print out a
single copy. For some of these links to work, you’ll need access to JSTOR
and/or Econbase. You automatically have this access if you are working from a
campus connection. If you’d like off-campus access, you’ll need to
set up a proxy account with the NYU library. Go to http://library.nyu.edu/help/proxy.html
NASD, 99, Nasd notice to members 99-99.
NASD, 2004, Notice to members 03-74 (Limit order protection).
Nasdaq, 2004b, Summary of the SuperMontage system.
Perold, Andre, 1988, The implementation shortfall: Paper vs. reality, Journal of Portfolio Management 14, 4-9.
Rubinstein, Ariel, 1982, Perfect equilibrium in a bargaining model, Econometrica 50, 97-110.