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2013/2014  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
Please check www.cbs.dk/summer for the course schedule.
Time Table Please see course schedule at e-Campus
Study board
Study Board for MSc in Economics and Business Administration
Course coordinator
  • Course instructor - Erik Theissen, University of Mannheim
    Patricia Plackett - Department of Operations Management (OM)
Main academic disciplines
  • Finance
Last updated on 14-05-2013
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,
  • understand the implications of market microstructure for other sub-disciplines of finance such as asset pricing and corporate finance.
Course prerequisites
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) or similar textbooks.
Prerequisites for registering for the exam
Compulsory assignments (assessed approved/not approved)
Mandatory Mid-term Assignment: The mid-term assignment will be a set of questions. Students will have to submit written answers to these questions.
Examination
Project / home assignment (written individually), 15 A4 pages:
Examination form Home assignment - written product
Individual or group exam Individual
Size of written product Max. 15 pages
Assignment type Written assignment
Duration Written product to be submitted on specified date and time.
Grading scale 7-step scale
Examiner(s) One internal examiner
Exam period Summer Term
Make-up exam/re-exam
Same examination form as the ordinary exam
Course content and structure

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.

The course's development of personal competences:
The course helps students to develop their writing and presentation skills.
Teaching methods
The course will consist of lectures with several short embedded case studies (about 60%), exercise sessions in which we will discuss questions related to the contents of the course (25%) and student presentations (about 15%).

Preliminary Assignment: To help students get maximum value from ISUP courses, instructors provide a reading or a small number of readings to be read before the start of classes with a related task or tasks in the first two classes in order to 'jump-start' the learning process. The preliminary assignment will be a short essay. The essay will be based on a set of required readings, and will be guided by a set of specific questions/issues to be addressed. The papers will be presented in class during the first week.
Expected literature

Required course readings and literature:

1 Introduction: The Functions of Asset Markets

  • Angel, J., L. Harris and Ch. Spatt (2011): Equity Trading in the 21st Cebtury. Quarterly Journal of Finance 1, 1-53. Downoad: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1584026
  • Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, chapters 9, 10 and section 28.2.2 in chapter 28.
  • De Jong, F. and B. Rindi (2009): The Microstructure of Financial Markets. Cambridge University Press, introduction and chapter 1.

 
2 Traders, Instruments, and Markets

  • Deutsche Börse AG (2005): The European Post-Trade Market. White Paper, chapters 1 and 2. Download: https://www.clearstream.com/ci/dispatch/en/binary/ci_content_pool/attachements/005_n ews/WP_European_Post-Trade_Market.pdf
  • Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, chapters 3-4, 7-8, 11-12, 16-17.

 
3 Market Design Issues I: The Big Picture

  • Foucault, T., M. Pagano and A. Röell (2013): Market Liquidity, Oxford University Press, chapters 1.1-1.3, 2, 3.1-3.3.
  • Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, chapters 5, 6, 13, 14.

 
4 Market Design Issues II: A Closer Look

  • Angel, J., L. Harris and Ch. Spatt (2011): Equity Trading in the 21st Cebtury. Quarterly Journal of Finance 1, 1-53. Downoad: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1584026
  • Foucault, T., M. Pagano and A. Röell (2013): Market Liquidity, Oxford University Press, chapters 1.4, 7.1, 7.5.
  • Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, chapters 15, 24-28.
  • Petrella, G. (2009): MiFID, Reg. NMS and Competition Across Trading Venues in Europe and United States. Working Paper. (available from ssrn.com)

 
5 Applications: Market Microstructure and the Real World

  • Amihud, Y. and H. Mendelson (2008): Liquidity, the Value of the Firm, and Corporate Finance. Journal of Applied Corporate Finance 20, 32-45.
  • Foucault, T., M. Pagano and A. Röell (2013): Market Liquidity, Oxford University Press, chapters 9, 10.
  • Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners, Oxford University Press, chapters 19, 21.

 
(Please note: One chapter does not correspond to one class)
Last updated on 14-05-2013