Content

This course is about trading and the international institutional context in which trading takes place. We investigate the people who trade various types of securities and contracts (stocks, bonds, derivatives, ... but also e.g. emission rights) , the trading venues where the trades are executed and the rules that govern trading. We thus look in detail at the decisions of various players in the markets including informed and uninformed traders, short- end long-term investors, brokers, ... . We model their optimal trading and price setting decisions and study the impact on markets in terms of price formation, liquidity, volatility, ... . Moreover we address the impact of institutional characteristics on these decisions and outcomes: the trading rules at the exchanges, the setup of an exchange and competition between trading venues. Finally, we study at various points the regulatory environment and model the trade-offs faced by regulators and supervisors of international financial markets. This course typically consists of different parts. Within each part, a number of topics are discussed.

Part 1: Financial Market Infrastructure

How do today’s international financial markets for trading securities operate? How does the trading and post-trading financial market infrastructure look like? What are the key players and their characteristics? This part introduces the key concepts and players and highlights differences in an international context.

Part II: Price Formation, Market Liquidity and Price Discovery
How do dealers set prices taking into account the costs and risks they face (order processing costs, inventory risk, asymmetric information risk, ...)? How can traders with superior information trade optimally (strategically) to exploit their information and what is the effect on markets in terms of prices, volatility, ... ? How can we measure certain concepts such as market liquidity, price impact or the probability of informed trading?
 
Part III: Endogenous order choice
What factors determine the optimal choice of a trader between various order types (limit, market and hidden order)? How does trading takes place without market makers and are markets able to absorb shocks? How do traders manage the risk of trading (e.g. the exposure of their orders or execution risk)?
  
Part IV: Competition between market places
In today's financial markets, trading occurs simultaneously in a number of trading venues, possible with a very different setup. Is competition between venues and the associated fragmentation of order flows beneficial? What are lit and dark market places? How do traders optimally determine their trading strategy in such an environment? What are the trade-offs for supervisors and what is the preferred regulation?
 

Part V: Post-Trade Infrastructure

What happens after a trade in concluded? How does clearing and settlement work?

Part VI: Special Topics
The last part of the course focuses on current “hot topics” in today's financial markets. Recent examples include an analysis of short-sale bans during the financial crisis, or the impact of uncertainty/ambiguity (as opposed to pure risk) on trading decisions and prices. 

Course material

Used course material

* Toledo is being used for this learning activity to make course material availabe.

Format: more information

Each lecture starts from a concrete problem or situations. It is then shown how fundamental theoretical and/or empirical models can be used to analyze the problem and provide a solution. Both technical aspects and financial-economic intuition will be discussed, as well as the more general context and applications of each model.