2012/2013  KAN-CM_SU8P  Trading and Exchanges

English Title

Trading and Exchanges

Course information
Language	English
Exam ECTS	7.5 ECTS
Type	Elective
Level	Full Degree Master
Duration	Summer
Course period	Summer NOTE: The course schedule is at the moment ONLY available at www.cbs.dk/summer
Time Table	Please see course schedule at e-Campus
Study board	Study Board for MSc in Economics and Business Administration
Course coordinator
Faculty - Erik Theissen, University of Mannheim Patricia Plackett - Department of Operations Management
Main Category of the Course
Finance
Last updated on 23-04-2012

Learning objectives

After this course students should be familiar with the trading and post-trading institutions in financial markets and their functions be able to describe the main market types (batched and continuous, quote-driven and order-driven) and to discuss their relative advantages and disadvantages be familiar with the theoretical foundations of dealership and auction markets be able to describe and apply the most important measures of liquidity understand the important role that informational asymmetries play in financial markets be familiar with recent trends in financial markets (such as algorithmic trading and dark pools) and be able to discuss their advantages and dangers understand how regulation affects market structure and market outcomes

Prerequisite

It is recommended that students are familiar with basic finance issues (such as the NPV rule, the theory of portfolio selection and the CAPM) at the level of standard finance textbooks such as Brealey/Myers/Allen (Principles of Corporate Finance, 10th. edition, McGraw-Hill 2011), Ross/Westerfiled/Jaffee/Jordan (Modern Financial Management, 8th edition, McGraw-Hill 2008), Berk/DeMarzo (Corporate Finance, Addison-Wesley 2008)

Examination

Trading and Exchanges

Project / home assignment (written individually), 15 A4 pages : Type of test Home Assignment Marking scale 7-step scale Second examiner No second examiner Exam period Summer Term Aids Please, see the detailed regulations below Duration Please, see the detailed regulations below Project/Home assignment (written individually), 15 A-4 pages

Course content

Traditional asset pricing theory and investment analysis treat the process of price formation as a black box. The actual structure of financial markets does not play a role, and frictions and transaction costs are disregarded. These issues, and market liquidity in particular, are of enormous practical importance. This is evidenced by the great attention regulators pay to issues of financial market structure (e.g. the MiFID directive of the EU), as well as by the attention market participants pay to trading costs. In recent years, many new markets have been created in an attempt to reduce transaction costs (e.g. the ATS in the US or Chi-X and Turquoise in Europe). Much of the order volume in today's markets is generated by computers rather than by human traders. This phenomenon (termed algorithmic trading or high frequency trading) has been accused of destabilizing markets, most importantly in conjunction with the infamous 2010 "flash crash". The branch of financial economics that deals with these issues is called market microstructure. This course provides an introduction into the institutional, theoretical and empirical foundations of market microstructure. It then applies these principles to several recent phenomena. We will discuss short selling restrictions, regulation and its effects on competition between market places, and algorithmic trading, to name but a few. The last chapter of the course will discuss relations between market microstructure and other areas of finance such as asset pricing and corporate finance.

Teaching methods

The course will consist of lectures with several short embedded case studies (about 70%) and exercise sessions in which we will discuss questions related to the contents of the course (30%)

Expected literature

Required course readings and literature: Textbooks (about 500 pages):   De Jong, F. and B. Rindi (2009): The Microstructure of Financial Markets. Cambridge University Press: Introduction and chapter 1.   Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press: Chapters 3-17, 19, 21, 24-28.   Papers (about 180 pages):   Amihud, Y. (2002): Illiquidity and Stock Returns: Cross-Section and Time-Series Effects. Journal of Financial Markets 5, 31-56.   Amihud, Y. and H. Mendelson (2008): Liquidity, the Value of the Firm, and Corporate Finance. Journal of Applied Corporate Finance 20, 32-45.   Angel, J., L. Harris and Ch. Spatt (2011): Equity Trading in the 21st Century. Quarterly Journal of Finance 1, 1-53.   Beber, A. and M. Pagano (2009): Short-selling Bans Around the World: Evidence from the 2007 - 2009 Crisis. Working Paper, November.   Deutsche Börse AG (2005): The European Post-Trade Market. White Paper, chapters 1 and 2. Download: http://deutsche-boerse.com/dbag/dispatch/de/listcontent/gdb_navigation/ settlement_custody/Content_Files/db_sp_white_paper.htm   Petrella, G. (2009): MiFID, Reg. NMS and Competition Across Trading Venues in Europe and United States. Working Paper. (available from ssrn.com)