FINE 690, Advanced Topics in Finance (Market Microstructure, MMF [PDF]

Jul 31, 2017 - “Trading and Exchanges: Market Microstructure for Practitioners”, Larry Harris,. Oxford University Pr

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FINE 690, Advanced Topics in Finance (Market Microstructure, MMF) Summer 2017 Instructor: Ruslan Goyenko E-Mail: [email protected] Teaching Assistant: Chengyu Zhang, e-mail: [email protected] Phone: 514 398 5692 Office (#510) Hours: M, T, R: 2-3pm.

Description Most finance courses are focused on how securities are valued, designed and used. The focus of this course is about how securities are traded. In the theoretical part of the course we will review the design, operation and regulation of trading processes across different markets. This is a necessary foundation to progress further with the applied part of the course. The applied part of the course uses Rotman Interactive Trader (RIT http://rit.rotman.utoronto.ca/ ) software installed in the trading lab (#205) and its trading cases. First, we focus on how security prices reflect information, news, and investor behavior; and how traders generate liquidity, volatility, and profits/losses. The role of various market participants such as dealers, brokers, arbitrageurs, buy-side traders and retail investors will be emphasized. Second, we will focus on new trends in financial markets including high frequency trading strategies to manage liquidity and price impact risks, and algorithmic trading. Third, we will proceed applying our skills to the types of decisions that traders, investors and risk managers must make in a variety of situations and trading in different asset classes. This course specifically focuses on the execution, mechanics, and measurement of financial trading strategies. It does not, for example, teach students ‘how to make money playing the market’. The course also requires a fair amount of programming either in VBA or Matlab, and extensively uses financial modeling in Excel. The trading cases are in class simulations which require the whole class to participate at the same time, i.e. trading by class participants adds to changes in aggregate supply and demand schedules in the simulated market and contributes to price impacts and price discoveries. Therefore the attendance of each class is highly recommended. To practice outside of the class, I will put RIT server on the laptop so that the market runs repeatedly.

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The focus of the course concepts will include, but not be limited to:  Market Microstructure , Market Liquidity and algorithmic strategies  Trading costs and measurement of trade execution quality  Public, private information and price discovery  Portfolio insurance and delta hedging  Hedge Fund Strategies: inter-listed arbitrage, risk-arbitrage, trading volatility Suggested Readings: There is no required textbook for this course. However, the highly recommended reading to follow the class notes is “Securities Trading: Procedures and Principles”, 2017, by Joel Hasbrouck (NYU, Stern) STPP. The class notes will also be based but not limited to the following books: “Trading and Exchanges: Market Microstructure for Practitioners”, Larry Harris, Oxford University Press, 2003 “Algorithmic Trading and DMA: An Introduction to Direct Access Trading Strategies, Barry Johnson, Myeloma Press, 2010 “Algorithmic Trading: Winning Strategies and Their Rationale”, Ernest Chan, Wiley, 2013 “Quantitative Trading”, Ernest Chan, Wiley, 2009 “Risk Management and Financial Institutions”, John Hull, Wiley, 4th edition Tentative (subject to change) schedule of topics covered Class and Topic Overview of the course Introduction: Order driven Markets

Cases, Assignments and Practice Exercises RIT Agency Trading 1 & 2 Cases

Limit Order Markets, Multiple Markets, Auctions

VWAP Exercise RIT Liability Trading 2 & 3 Cases

Liquidity Risk, Dark Liquidity and Dark Mechanisms

VWAP Exercise RIT Liability Trading 2 & 3 Cases

Multiple Venues and Arbitrage

Cross-listed arbitrage exercise RIT Liability Trading 4 case

Resources Lecture Notes AT1 & AT2 Case Materials STPP ch. 1-2 Lecture Notes LT2 & LT3 Case Materials RIT RTD Documentation STPP ch. 3-4 Lecture Notes LT2 & LT3 Case Materials RIT RTD Documentation STPP ch. 4-5 Lecture Notes LT4 and ALGO Case Materials

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RIT ALGO1, 2, 3 cases Trading Costs and Price Discovery Information

RIT Price Discovery 1,2,3

Private, Public information and Insider trading Optimal Trading Assessing the difficulty of Strategies orders, choosing between trading algorithms Execution Tactics and Predicting Liquidity and Algorithm Overview Volatility RIT Options 3 case Fixed Income Pricing RIT Fixed Income 1,2, 3, Interest rate risk, Default 4, 5 risk, Yield Curve Hedging: Options RIT Options 1,2, 3 Real Economy Risk

RIT COM2 Case

Commodity Arbitrage

RIT COM5 Case COM5 Performance Evaluation

Evaluation and Grades: Performance Evaluation LT4 Performance Evaluation ALGO2 Performance Evaluation ALGO3 MIDTERM FI-performance evaluation Performance Evaluation COM5 Options: Delta Hedging and Trading Volatility, Evaluations Reports - ongoing Bloomberg Certification

RIT VBA API Documentation STPP. Ch 6 Lecture Notes STPP ch. 7-8 Lecture Notes STPP ch. 9-11 Lecture Notes STPP ch. 12-13 Lecture Notes STPP ch. 13, 14 Lecture Notes FI2, FI3, FI4, & FI5 Lecture Notes Lecture Notes COM2 & COM5 Case Material Lecture Notes COM5 Case Material

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BLOOMBERG CERTIFICATION Bloomberg Institute and BMC teaches the foundations of the major asset classes using data, news and analytics from the Bloomberg terminal. It consists of 4 modules: Economic Indicators, Currencies, Fixed Income and Equities. Through BMC, you will also become familiar with 70 of the most frequently used Bloomberg Terminal functions which will provide you with a fantastic competitive edge in interviews with prospective financial employers. You must complete all four modules by July 31, 2017 to receive course credit. Once you complete the course you can download a resume-enhancing Bloomberg certificate of completion. Trading Evaluations There will be multiple trading evaluations run through the course of the term. For these evaluations, you will be graded based on your ability to successfully execute proper trading strategies and generate trading profits (in the simulated world). Score will be based on your average rank across several replications of the RIT cases. COURSE FORMAT AND EXPECTATIONS Students are expected to attend all classes. Students are also expected to conduct themselves in a manner that is reflective of maintaining an orderly marketplace. They should not submit trades in a malicious or abusive way or use information not specifically available to them.

Format for assignments: You must hand in a hard copy of your assignment reports that has an executive summary and is self-contained, i.e. with tables, figures and etc integrated into the text. Please note that clear, concise and correct writing will be considered in the evaluation of the assignments.

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