The Structure and Dynamics of Financial Markets (Last updated: 07:53:52 Wednesday February 01, 2012)

B40.3149 Spring (January mini-term) 2012 

Professor Joel Hasbrouck
jhasbrou@stern.nyu.edu
www.stern.nyu.edu/~jhasbrou

Where are we now? Jump to schedule

Announcements

• January 19, 2011. Our first class is Tuesday, January 24, 6-9pm, MEC UC-25. Prior to class:
  1. The description of the trading games I'll be doing is written up in Games. The first one we'll be doing is the VeconLab investment game. The write-up includes instructions for logging in to VeconLab, and instructions for playing the investment game. The link is http://veconlab.econ.virginia.edu and the session name is "fsn1" (eff ess en one). Try to play the game once prior to class.
  2. If you can, complete the Interactive Broker's registration procedure. (This is not essential for the first class; I'll be showing IB screens, but it won't be necessary for you to use your account in-class.)
  3. Please remember to bring your laptops to class. Some of the VeconLab trading games are best run in-class.
• ...

Overview

This class is about market microstructure and trading. Many Stern Finance courses are about the securities that get traded (stocks, bonds, options, and so on) and how they should be valued. This course looks at how securities are traded: the operation and design of trading mechanisms and protocols. The main course prerequisite is B01.2311 (Foundations of Finance).  In that class you probably spent a session covering the NYSE, Nasdaq, types of orders, etc. The reading was Chapter 3 (“Financial Markets”) in Bodie, Kane and Marcus, either Investments or Essentials of Investments. This class takes that session/material as the point of departure.

The main focus of the course is the continuous limit order book, the mechanism used for most trading in futures, options and stocks worldwide. But other protocols are used as well, so we’ll also look at auctions, open-outcry (“pit” or “floor”) markets, and their variations. The course draws on material from classical economic theory, behavioral economics and finance, and statistics. Although the course will cover many strategic aspects of trading, it is not primarily about trading systems or proprietary trading.

The course is aimed at people who are working for (or plan careers in) securities exchanges, securities trading, or trading support systems.  It is a specialized course: it goes into great detail about the mechanics of trading processes.

Class sessions will involve lectures, discussions and exercises.

Some class sessions will involve computerized trading exercises. Some of these will be done online and in class. So it's very important that you have or can borrow a notebook or netbook computer with wifi. These excercises will count toward the final grade, so class attendance is very important.

The class sessions are:

• Tuesday, Jan 24, 2012, 6-9pm
• Thursday, Jan 26, 6-9pm
• Sunday, Jan 29, 9am-5pm
• Tuesday, Jan 31, 6-9pm
• Thursday, Feb 2, 6-9pm (Exam)

Please make sure that you can attend all sessions before you sign up for the course.

Deliverables

The final grade in the course will depend on three things (weights approximate)

• Participation and profits in the trading games (10-15%)
• Exam (85-90%)

Readings

There is no textbook for the course. Readings will be drawn from my class notes and articles.

Topics and schedule (Tenative)

Session 1 (Tuesday, 24 January) Overview of US equity markets

• Class notes Part I and Part II
• Media links to class session
  • Rich Media:
    http://echo360.stern.nyu.edu:8080/ess/echo/presentation/3b3d9eea-d500-4db4-b6b4-be0232e545ff
  • Vodcast:
    http://echo360.stern.nyu.edu:8080/ess/echo/presentation/3b3d9eea-d500-4db4-b6b4-be0232e545ff/media.m4v
  •  Podcast:
    http://echo360.stern.nyu.edu:8080/ess/echo/presentation/3b3d9eea-d500-4db4-b6b4-be0232e545ff/media.mp3
  • Course Portal:
    http://echo360.stern.nyu.edu:8080/ess/portal/section/01ebf652-63f8-4cc3-8dd7-f3e11517f395
• B/View is a Java program that shows how a limit order book evolves throughout the day.
• mvr.xlsx is an Excel spreadsheet that contains ticker symbols, company names, listing exchanges, market capitalizations, and average trading volumes for about five thousand stocks that trade in US markets.
• Thirteen stocks / Twenty Days (about 7 MB) This is a pdf file containing over 200 plots of bids, asks, and trades for a sample of thirteen stocks over the twenty trading days in April 2011. The sample is not random: I look at only a few relatively small stocks. The legend for the plots is: the NBB (National Best Bid) is in blue; the NBO (National Best Offer) is in red; trades are shown in black. A small solid dot indicates a trade of 100 shares or less; a larger circle indicates 101-1,000 shares; the largest circle indicates trades above 1,000 shares.

Session 2 (Thursday 26 January) Public and private information

• Class notes
• Spreadsheet SimpleSequentialTradeModel02.xlsx
• Media links to the class session

Session 3 (Sunday, 29 January AM)

• Topics
  • Auctions
  • Opening and closing procedures
  • Designated market makers
• In-class exercise: the Sternex floor market
• Class notes (also covers PM session)
• Media links
  • Rich Media: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/65904493-ee61-4ae0-839c-c61fdd026fcc
  • Vodcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/65904493-ee61-4ae0-839c-c61fdd026fcc/media.m4v
  • Podcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/65904493-ee61-4ae0-839c-c61fdd026fcc/media.mp3
  • Course Portal:
    http://echo360.stern.nyu.edu:8080/ess/portal/section/01ebf652-63f8-4cc3-8dd7-f3e11517f395

Session 4 (Sunday, 29 January, PM)

• Topics
  • Dealer markets
  • Dark liquidity
  • Algorithmic trading I: Order types and qualifications
• In-class exercise: computerized double auction
• Media links
  • Rich Media: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/a3a00acd-6656-4d09-b737-00bf1a88f44d
  • Vodcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/a3a00acd-6656-4d09-b737-00bf1a88f44d/media.m4v
  • Podcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/a3a00acd-6656-4d09-b737-00bf1a88f44d/media.mp3
  • Course Portal: http://echo360.stern.nyu.edu:8080/ess/portal/section/01ebf652-63f8-4cc3-8dd7-f3e11517f395

Session 5 (Tuesday, 31 January)

• Topics:
  • Algorithmic trading II: order splitting
  • Trading costs
  • Reg NMS
  • The May 6 2010 Flash Crash.
• Class notes (revised at the top p. 17)
• Sample Rule 605 data for BATS exchange, ticker EIHI
• Media links
• Rich Media: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/50e71af3-7373-4294-9e5c-0f5c7a736206
• Vodcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/50e71af3-7373-4294-9e5c-0f5c7a736206/media.m4v
• Podcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/50e71af3-7373-4294-9e5c-0f5c7a736206/media.mp3
• Course Portal: http://echo360.stern.nyu.edu:8080/ess/portal/section/01ebf652-63f8-4cc3-8dd7-f3e11517f395
• Required readings
  • Introduction to SEC Regulation NMS: Final Rule. The SEC's "Reg NMS" (2005) established the framework for our present equity market structure. 
    • The full document is at: SEC Regulation NMS: Final Rule.
• Executive Summary of the SEC/CFTC joint report.
  • The full document is at Findings Regarding the Market Events of May 6, 2010
• Supplemental Readings
  • Parts I-III of SEC Concept Release on Equity Market Structure. This is is a broad thoughtful study of current issues and concerns.
    • The full document is at SEC Concept Release on Equity Market Structure, January 2010.

Session 6 (Thursday, 2 February)

• Final exam (sample questions).