This course deals with how financial securities are traded, and how the structure of markets affects price formation, market liquidity, and asset allocation. In most finance courses, the mechanism behind the determination of prices is treated as a black box. In this course the box will be opened and we will study how actual market trading mechanisms and market participants affect pricing, liquidity, and asset allocation.
We will study how trading frictions generate deviations of assets prices from their fundamental value and how these deviations are exploited through arbitrage; how prices are formed when markets are designed as limit order markets, dealer markets, dark pools and call auctions; how market liquidity is defined and how it is affected by market design, market participants, and how market liquidity in turn affects the decisions of the various market participants. Topics are:
- Market efficiency and arbitrage
- Trading mechanics and market structure
- Defining, measuring, and estimating market liquidity
- Trading and price discovery
- Key players of the trading industry
- Market design and regulation
- Market transparency
- The effect of liquidity, and price discovery on corporate finance policies