390016 SE PhD-VGSF: Market Microstructure (2016S)

This is a research course on the microstructure of markets. The goal is to develop a deeper understanding of the “invisible hand” of the Walrasian auctioneer. Market microstructure applies to the whole spectrum from well-organized liquid and automated financial markets to illiquid over-the-counter markets such as real estate, labor markets for specialists, or arts. It discusses how the microstructure of trading does affect price discovery and price informativeness, price volatility and market liquidity.

The course introduced the basic measures of (il)liquidity and price informativeness and provides the basic theoretical work horse models (Glosten/Milgron, Kyle) to analyze their empirical regularities.

The main part of the course discusses the role of trading rules and transparency on individual behavior and resulting price discovery. This allows a better understanding of the relative advantages of the many different real world market designs. This provides a basis for the discussion of topical phenomena such as high frequency trading, dark pools and cross-market trading.

This course is intended for doctoral students to specialize in finance and/or economics. It provides an introduction into the microstructure of markets. Follow-up special topics courses are intended that focus on specific issues such as corrections of potential market failures due to high-frequency trading or the optimal design of (opaque) over-the-counter markets.