Empirical Market Microstructure

Table of Contents

1. Introduction

1.1 Overview
Sources of Value and Reasons for Trade; Mechanisms in Economic Settings; Multiple Characterizations of Prices

1.2 Liquidity
1.3 Transparency
1.4 Econometric Issues
1.5 The Questions
1.6 Readings
1.7 Supplements to the Book

2. Trading Mechanisms

2.1 Limit Order Markets
2.2 Floor Markets
2.3 Dealers
Dealer Markets; Dealers in Hybrid Markets

2.4 Auctions and Other Clearing Mechanisms
2.5 Bargaining
2.6 Crossing Networks and Derivative Pricing
2.7 Concluding Remarks

3. The Roll Model of Trade Prices

3.1 Overview
3.2 The Random-Walk Model of Security Prices
3.3 Statistical Analysis of Price Series
Near-Zero Mean Returns; Extreme Dispersion; Dependence of Successive Observations
3.4 The Roll Model of Bid, Ask and Transaction Prices

4. Univariate Time Series Analysis

4.1 Stationarity and Ergodicity
4.2 Moving Average Models
4.3 Autoregressive Models
4.4 Forecasting
4.5 Estimation
4.6 Strengths and Weaknesses of Linear Time Series Models

5. Sequential Trade Models

5.1 Overview
5.2 A Simple Sequential Trade Model
5.3 Market Dynamics: Bid and Ask Quotes Over Time
5.4 Extensions
Quote Matching; Fixed Transaction Costs; Price-Sensitive Liquidity Traders and Market Failures; Event Uncertainty; Orders of Different Sizes; Orders of Different Types
5.5 Empirical Implications
5.6 Price Impact

6. Order Flow and the Probability of Informed Trading (PIN)

6.1 The Distribution of Buys and Sells
6.2 Event Uncertainty and Poisson Arrivals
6.3 Discussion

7. Strategic Trade Models

7.1 The Single-Period Model
7.2 Multiple Rounds of Trading
7.3 Extensions and Related Work

8. A Generalized Roll Model of Trade Prices

8.1 Overview
8.2 The Structural Model
8.3 Statistical Representations
8.4 Forecasting and Filtering
8.5 The Pricing Error: How Closely Does pt Track mt?
8.6 General Univariate Random-Walk Decompositions
8.7 Other Approaches
Appendix: Identification in Random-Walk Decompositions

9. Multivariate Linear Microstructure Models

9.1 Modeling Vector Time Series.
9.2 A Structural Model of Prices and Trades
9.3 Resolution of Contemporaneous Effects
9.4 The Random-Walk Variance
9.5 Implementation Issues
Timing and Signing; Signed Order Variables; Event Time or Wall-Clock Time?; Trade Prices or Quote Midpoints?
9.6 Other Structural Models
Glosten and Harris; Madhavan, Richardson and Roomans
9.7 Estimating Price Impact from Returns and Volume

10. Multiple Securities and Multiple Prices

10.1 Stacked Models of Multiple Prices
10.2 Cointegrated Prices
The Structural Model; The VMA Representation; Autoregressive Representations
10.3 General VECM Specifications
Multiple Prices; Extensions; Testing and Estimating Cointegrating Vectors; Pairs Trading
10.4 Time

11. Dealers and Their Inventories

11.1 Inventory Control
Garman; Amihud and Mendelson
11.2 Risk Aversion and Dealer Behavior
11.3 Empirical Analysis of Dealer Inventories
A First Look at The Data; Inventories and Trades: Levels and Differences; Stationarity; Invertibility
11.4 The Dynamics of Prices, Trades and Inventories
11.5 Concluding Remarks

12. Limit Order Markets

12.1 The Choice between a Limit and Market Order
12.2 Equilibrium
The Parlour (1998) Equilibrium Model; The Foucault (1999) Equilibrium Model
12.3 Empirical Event Models

13. Depth

13.1 Market Structures and Liquidity Suppliers
The Competitive Dealer Market; The Limit Order Book; A Monopolistic Dealer
13.2 The Customers13.3 Equilibrium in the Three Regimes
The Competitive Dealer Market; The Limit Order Market; The Monopolistic Dealer
13.4 Additional Empirical Evidence on Limit Order Book Price Schedules
13.5 Hybrid Markets and Depth Improvement

14. Trading Costs: Retrospective and Comparative

14.1 Overview
14.2 The Implementation Shortfall
The Implementation Cost for Liquidity Suppliers; Benchmark Prices
14.3 Applications of the Implementation Shortfall
Institutional-Level Order Data; Market Level Order Data; Market Level Trade and Quote Data; Selection Effects

15. Prospective Trading Costs and Execution Strategies

15.1 Models of Order Splitting (Slicing) and Timing
The Basic Problem; Slowly-Decaying Non-Stochastic Temporary Effects; Slowly-Decaying Stochastic Temporary Effects
15.2 Models of Order Placement
The Basic Barrier Diffusion Model; Random Execution; Empirical Analysis of Limit Order Execution

Appendix: U.S. Equity Markets

A.1 Functional Overview
A.2 The New York Stock Exchange
The NYSE as an open outcry (“floor” market); The dealer (specialist); The limit order book; The bid and ask quotes; Executions; Opening and closing procedures; Governance and alliance
A.3 Nasdaq
The Manning Rules; The collusion charges; The SEC’s rule on Order Execution; Obligations; SuperMontage; Governance and Alliances
A.4 The New Trading Systems
A.5 Decimalization
A.6 The Consolidation and Fragmentation Debate
A.7 Access and Intermarket Linkage Systems
A.8 Regulation NMS