FE570 Market Microstructure and Trading Strategies

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Semester: Fall 2012 Day of Week/Time

Tuesdays 6.15-8.45 PM
Burchard 430 and Hanlon Finance Lab

Instructor name and contact information

Steve Yang, Babbio 536

Office Hours: Wed 10:00AM-11:00AM

Class Website: Moodle


This course offers an overview of modern financial markets for various securities (equities, FX, and fixed income), different types of traders, orders, and market structures, market microstructure models used for describing price formation in for the various markets including inventory models and information-based models and models of limit-order markets. It also introduces several typical trading strategies including trend, momentum, and oscillator-based strategies, arbitrage trading strategies, as well as the methods of deriving and back-testing these trading strategies. Students are required to learn the basics of R statistical computing language, and be able to analyze financial data using the models learned from this course.

Learning Goals

After taking this course, the student will be able to:

  • Form a broad understanding of how various markets work and how securities are traded.
  • Develop a firm understanding the mechanics of market microstructure and price discovery.
  • Formulate and back-test various trading strategies.
  • Be able to analyze market data and discover market patterns using R package.

Required Text(s)

  1. Financial Markets and Trading: An Introduction to Market Microstructure and Trading Strategies, By Anatoly B. Schmidt, John Wiley & Sons, Inc.- ISBN - 978-0470924129
  2. Empirical Market Microstructure, By Joel Hasbrouck, Oxford University Press, ISBN - 978-0195301649

Lecture Outline

Week Topic(s) Reading(s) HW
1 Introduction to Financial Markets
2 Modern Financial Markets and Trading Mechanism J.Hasbrouch[1,2] HW1
3 The Roll Model of Trade Prices J. Hasbrouck [3]
4 Univariate Time-Series Analysis I J. Hasbrouck [4]
5 Univariate Time-Series Analysis II J. Hasbrouck [4] HW2
6 Inventory Models A.Schmidt[3]
7 Market Microstructure: Information-based Models A.Schmidt[4]
8 Empirical Market Microstructure A.Schmidt[6] HW3
9 Mid-term Exam EXAM-I
10 Technical Trading Strategies A.Schmidt[10]
11 Arbitrage Trading Strategies A.Schmidt[11]
12 Optimal Order Execution A.Schmidt[13] HW4
13 Implementing and Back-testing of Trading Strategies I A.Schmidt [12]&Others
14 Implementing and Back-testing of Trading Strategies II A.Schmidt [12]&Others
15 Implementing and Back-testing of Trading Strategies III A.Schmidt [12]&Others
16 Final Exam EXAM-II

Final Project

You will be given a dataset, and you will apply the methods which you have learned. If you do it right, this can be an immensely satisfying experience. You will turn in this project - I don't want the computer output, but descriptions of the results IN YOUR OWN WORDS - 3 single spaced pages, including plots, at most. We will talk more about this as the semester proceeds. You will each give a brief presentation on your project to the class, during the last week - Attendance is MANDATORY at the presentations – Dec 18 (tentatively)!!!


Attendance will be taken randomly (e.g., 6-7 times during the semester) and will determine "which direction" the resulting grade will “fall”, for those grades which are borderline (e.g., between B+ or A-).