Introduction to Market Microstructure

224 students

Course introduction

Market microstructure is often an overlooked field, far less known than many other fields in finance. Questions of market design, trading, and liquidity have long been wrongly considered a minor subject. But the 2008 liquidity crisis and the strong development of high frequency trading have proved otherwise. Today lectures on market microstructure are spreading in finance masters’ programmes.

Nevertheless, from the outside markets often look mysterious, and the smaller the timescale, the more technical and mysterious they seem. Short-term price changes may seem strange and hard to interpret. In fact, we will show you that with some key concepts in mind and some basic reasoning you will understand the main mechanisms at play in electronic trading in just 2 hours. This MOOC can also be viewed as a first step for everyone before they have access to more advanced academic material.

Firstly, whether the next trade is most likely to be a buy or a sell.

Secondly, where the next quotes will be on average after a given trade.

And lastly, where our expected average price will be 30 seconds after a trade occurs on a given exchange.

 

Main content of this five-part lecture

In practice, our lecture is divided into 5 independent parts, with 17 videos in total.

The initial introduction is designed for attendees that are not familiar with today’s market principles and trading terminology.

The first part describes the European liquidity landscape from MiFID 1 to MiFID 2 over the past 10 years.

The second part introduces the key practical questions in Microstructure from an investor’s perspective.

The third part highlights the orderbook properties that relate to turnover, spread volatility and available sizes on the first limits.

The last two parts are designed for attendees who want more than just a basic introduction to market microstructure.

The fourth part reviews questions of competition across markets and market fragmentation.

The fifth and final part highlights three examples regarding orderbook forecasting

 

Who is this course for?

This is an introductory course. It was created for non-specialists: for students, practitioners who are already working in finance, as well as for academics from other fields.

Today the problem is that for anyone who needs to seriously refresh their memories of their probability course, advanced specialised books written by academics won’t be an easy option.

On the contrary, our course has no prerequisites. The only thing we rely on is our attendees’ curiosity about markets and a taste for data and logical reasoning.

  • Introduction
  • I. European markets fragmentation and liquidity
  • II. Key practical questions from an investor's point of view
  • III. Key orderbook properties
  • IV. Market fragmentation and competition across venues
  • V. Key forecast based on the orderbook

Instructors

Paul Besson 180x180

Paul Besson

Paul heads Euronext’s Quantitative Research department. His main area of research is Market Microstructure
and Behavioural Finance on Flows Analysis. Prior to this he held the same position for seven years
at Kepler Cheuvreux.
Paul has twelve years’ previous experience as a fund manager in quantitative arbitrage,
both for hedge funds and long-only funds. Paul regularly presents papers at academic conferences
and has authored various publications on Market Microstructure in applied journals.
He has been a lecturer for a number of institutions,
and still gives lectures for Paris Dauphine University.
Paul graduated from ENSAE Paris.

Co-authors

Stéphanie Sureau 180x180

Stéphanie Sureau

Stéphanie Sureau works as a Quantitative Analyst in the Quantitative Research team of Kepler Cheuvreux.
For the past years, she has conducted research on market-flows as awell as on cost of capital-driven strategies.
She also published research publications on trading and execution.
She previously worked on Corporate Brokerage strategies.
Stéphanie graduated with a B.Sc. from Paris Dauphine University;
majoring in Applied Mathematics and Financial Markets; and passed Level III of the CFA exam.
She started her professional experience by studying energy products in an Asset Management firm.

Matthieu Lasnier 180X180

Matthieu Lasnier

As a Quantitative Analyst within the Kepler-Cheuvreux Quantitative Research team, Matthieu Lasnier is
an expert in market microstructure and has developed a strong expertise in the field of market impact.
As he is in charge of market microstructure and transaction cost analysis questions,
he monitors and studies the changes that have occurred in the European
and American equity markets since the regulatory changes at the origin of the fragmentation.
Matthieu is also the author of academic publications on market impact. Matthieu is a former student
of the Ecole Normale Supérieure (ENS-Lyon),
from ENSAE (National School of Statistics and Economics-Paris)
and also holds a Master of Science in mathematics from Paris-7.

Biwei Cui 180x180

Biwei Cui

Biwei is a Quantitative Analyst on the Quantitative Research team at Kepler Cheuvreux.
Since 2017, he has conducted quantitative analysis on Corporate Brokerage strategies,
focusing on stocks’ liquidity characteristics or price-guaranteed interventions.
Before joining, he was part of the Financial Engineering team at BNP Paris Asset Management,
focusing on model-driven investment solutions and portfolio structuring.
Biwei graduated from ENSAE (National School of Statistics and Economics-Paris)
with a master’s degree in quantitative finance. He also holds another master’s degree
from Telecom Bretagne in computer science.

“Paul Besson is a world-expert in the areas of market microstructure and algorithmic trading. He has recently produced a fine series of  lectures on this  subject. Lectures cover order-book dynamics, execution costs,  the market impact of trading, transaction cost analysis and other topics which are hard  to find together in  one place, let alone in MOOC format . I recommend  Paul’s lectures to all those interested in learning more about this essential part of modern stock trading.” (New York, May 2020)

 

Professor Marco Avellaneda, New York University

 

 

“Financial markets today are extremely complex, and the language of markets is full of jargon and acronyms, which makes it difficult for people working outside of the markets to understand how markets work.  Paul’s MOOC makes market microstructure accessible to everyone.  He carefully explains the basic building blocks of the market including order books, algorithms, and liquidity.  Then he moves on to help the viewer to understand the interaction between competition and liquidity and why microstructure is important.  I recommend the MOOC to anyone wanting to enhance their understanding of markets.” (Sydney, May 2020)

Professor Carole Comerton-Forde, UNSW

 

 

 

“Paul Besson has built a one of a kind course that I recommend to anyone interested in market microstructure. It is an accessible entry point for beginners, but is also be useful to advanced researchers in the field. The course takes an approach to market microstructure, that relies on data science and the practical exercises help strengthen the concepts. Highly recommended!” (New York, May 2020)

Sasha Stoikov, Cornell

 

 

“Paul Besson’s MOOC on market microstructure gives a unique insight on cutting-edge stylized facts on price formation and order matching mechanisms. I recommend it to all graduate students, researchers seeking realistic analyses, and quants who have to understand the mechanisms in place when information is digested by prices, at both high frequency and low frequency.

Paul is a high-level practitioner who is contributing to the common understanding that academics and industry practitioners have been jointly building for years. It is a chance for all of us that he provides, under the umbrella of the Louis Bachelier Institute Research Initiative on microstructure, such a wonderful dissemination material.” (Paris, May 2020)

Charles-Albert Lehalle, Head of Data Analytics CFM, Visiting researcher at Imperial College, and Member of the Scientific Committee of the AMF

 

 

A liquid and stable stock market plays a critical role in the economy. It channels savings into long term investments that are necessarily illiquid while providing liquidity to investors through access to their capital when needed by trading with others, thereby promoting economic growth.  Therefore every investor has to know how stocks are traded – i.e., the microstructure of the stock market — some in more detail than others. Paul Besson’s MOOC, “Practical Introduction to Market Microstructure”, integrates theory and practice in the market microstructure area in an elegant manner taking into account recent developments in practice that will meet the demand for knowledge from individual investors as well investment professionals.  An impressive achievement!” (Chicago, May 2020)

Ravi Jagannathan, Professor of Finance, Kellogg school of management, Northwestern University

 

 

“The mooc by Paul is just the perfect introduction to market microstructure. As a practitioner, Paul’s lectures are completely in line with actual market practices and challenges. No heavy mathematics or too simple irrealistic models here but an efficient, rigorous and pragmatic view about what is important to understand in this field which is at the very heart of financial markets. Thanks to Paul pedagogical efforts, several degrees of lectures are possible.
It means that this mooc is addressed at the same time to beginners, without any knowledge of finance or mathematics, and to researchers or market practitioners who wish to know more about the topic. From a broker’s as well as from an exchange’s perspectives, Paul presents in a very clear way the key concepts and issues taking place at the microstructure level. The interactions between the different agents (traders, brokers, investors, exchanges, regulators…) are very well described so that at the end of the lectures, one is able to perfectly understand the subtle equilibrium that the microstructure ecosystem represents. More than that, Paul also provides the most relevant technical elements enabling us to have a quantitative view on the mechanisms operating at this microscopic level, where the price formation process originates. I highly recommend Paul’s mooc to anybody interested in the field and will definitely use it myself in my classes.”

Mathieu Rosenbaum, Professor of Quantitative finance at Ecole Polytechnique
 
 
 
Paul Besson’s mooc will enable anybody with no particular background in finance to familiarize with applied market microstructure. This course teaches some fundamental concepts on how today’s financial markets operate and gives a first glimpse on the interactions between key financial market features. Therefore, it can also be a nice introductory course for students willing to go deeper in this area of finance.”
 
Gaëlle Le Fol, Université Paris-Dauphine

 

 

Remerciements

Together with my co-authors, we would like to thank those who contributed to this Mooc.
 
In particular Feriel Boushaki from the Institut Louis Bachelier for her precious support on this project, our editors: Greg Aston, Andy Artus, Keith Katlin and Anton Gerasimov, for their precious help; Alix Beaurepaire, Paul Farnet and Aurelien Crocq from “The Mooc agency” for their technical contribution, and finally all the trainees, traders and professionals whose many questions helped us to build this Mooc.
 
I would also like to thank the project’s partners: the Institut Louis Bachelier, the Collège de France and the Kepler Cheuvreux research initiative for their sponsorship.

Sources

Video 3 – part 1 Section 1

Primary market share

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Apr-2007 to Dec-2018
  • Remarks: median (PM share) across stocks,
    PM share = avg (PM turnover, 20 days sliding) / avg (consolidated turnover, 20 days sliding)

Market fragmentation in Europe (2018)

  • Sources: Reuters
  • Stock universe: Europe (defined by Reuters)
  • Period: Jan-2019 to June-2019
  • Remarks: sum (lit turnover), lit = on book lit + on book LIS + auction + periodic auctions,
    dark = dark TFPT

Fragmentation by country in 2018

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Jan-2018 to Dec-2018
  • Remarks: sum (turnover in euro by primary listing country)

Dark market shares in Europe since 2008

  • Sources: Reuters
  • Stock universe: Europe and countries defined by Reuters
  • Period: Jan-2008 to Jan-2019
  • Remarks: dark RFPT / (on book lit + on book LIS + auction + periodic auctions + dark RFPT)

Video 3 bis – part 1 Section 2

Market turnover and volume since 2007

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Apr-2007 to Dec-2018
  • Remarks: turnover = average daily turnover on all stocks (sum / nb trading days), volume = turnover / avg(index level over the year) , base 100 versus 2007 values

European Bid-Ask spreads since 2007

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Apr-2007 to Dec-2018
  • Remarks: median (spread on the primary market) across stocks, spread by stock = VWAS (volume weighted, 20 days sliding)

Rise of closing auction volumes since 2007

  • Sources: ICE-IDC
  • Stock universe: Total Market Index
  • Period: Apr-2007 to Dec-2018

Video 4 – part 2 Section 1

Daily turnover and free-float market cap

  • Sources: ICE-IDC
  • Stock universe: Total Market Index
  • Period: Jan-2018 to Dec-2018

Practical values of the free-float market cap and the daily turnover

  • Sources: ICE-IDC
  • Stock universe: Total Market Index
  • Period: Jan-2018 to Dec-2018

 Bid-ask spreads tighten with free-float market cap

  • Sources: ICE-IDC
  • Stock universe: Total Market Index
  • Period: Jan-2018 to Dec-2018

Practical values of the average number of trades and the average trade size (ATS)

  • Sources: ICE-IDC
  • Stock universe: Total Market Index
  • Period: Jan-2018 to Dec-2018

Video 4 – part 2 Section 2

Main types of trading and trading algorihtms

Video 6 – part 2 Section 3

Market impact modelling

Intraday volume curve

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Jan-2016 to Dec-2018
  • Remarks: 6 month lookback, median

How volume curves change on specific events?

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Jan-2013 to Dec-2018

Video 7-8-9-10 – part 3 Sections 1,2,3,4

Orderbook properties

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Jan-2017 to Dec-2017
  • Remarks: over-time, across stocks

Video 11 – part 4 Section 1

Historical fragmentation

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Apr-2007 to Dec-2018
  • Remarks: median (PM share) across stocks, PM share = avg (PM turnover, 20 days sliding) / avg (consolidated turnover, 20 days sliding)

Video 12 – part 4 Section 2

Fragmentation and relative orderbook characteristics

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Jan-2018 to Jun-2018

Video 13 – part 4 Section 3

Fragmentation and relative orderbook characteristics

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Jan-2018 to Jun-2018

Video 14 – part 5 Section 1

Which data for which forecasting horizon?

Video 15 – part 5 Section 2

Empirical probability to trade at the ask

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: Feb 2016
  • Remarks: All trades, group of  100 trades, according to trading imbalance

Video 16 – part 5 Section 3

Where will the next trades’ orderbook be after an agressive buy?

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: July 2018
  • Remarks: All main venues (Primary, Cboe-ChiX, Cboe-Bats, Turquoise), All trades on primary markets and main MTFs

Video 17 – part 5 Section 4

Ask prices after an agressive buy

  • Sources: ICE-IDC
  • Stock universe: DJ STOXX 600
  • Period: April 2019
  • Remarks: All trades on primary markets and main MTFs

Download source

Bibliography

Books I would recommend for further investigating Market Microtructure

 

Best introduction on exchanges I recommend to everyone

  • “Who Gets What and why: The New Economics of Matchmaking and Market Design” by Roth (2015)

 

Oldest but very nice book from an economist

  • “Market Microstructure theory” by O’Hara (1998)

 

Nice classical book not technical

  • “Trading and Exchanges: Market Microstructure for Practitioners” by Harris (2002)

 

Great book with all key economic concepts very well presented

  • “Empirical Market Microstructure” by Hasbrouck (2007)

 

Recent book with an economic view point

  • “Market Liquidity: Theory, Evidence, and Policy” by Foucault, Panago, and Roell (2013)

 

Very good and easy to read book by my friend Charles-Albert 

  • “Market Microstructure in practice” by Lehalle, Laruelle, Burgot, Lasnier and Pelin-Sureau (2013 and 2018)

 

Advanced and recent book for quant readers

  • “Trades, Quotes and Prices” by Bouchaud, Bonart, Daunier and Gould (2018)
Download bibliography

FAQ

For those interested in further exchanges on Microstructure, I have created a Linkedin Group “MOOC Introduction to Market Microstructure” for the attendees of the MOOC “Introduction to Market Microstructure” but more generally for all market practitioners, students and academics who want to interact about Market Microstructure.

 

Q1: Can I take this course for free?

Yes, this MOOC is free it is made for sharing knowledge.

 

Q2:  Can I earn a certificate?

Unfortunately, we only offer a Quizz, but we do not provide a course certificate.

 

Q3: How can I enroll?

Just click on the enrollment button at the bottom of “Overview and enrollment”.  

 

Q4: How can I ask questions to the instructors?

If your question is on a specific slide content, we recommend to write your question at the bottom of each video.

If you want to ask a more general question to the instructors, please use the specific email address below: mooc.microstructure@institutlouisbacherlier.org

 

Q5: Is the course schedule flexible?

Yes, you can learn at your own pace, once you enrolled you can watch our lectures and take our quiz when you want and how many times you like.

 

Q6: How much time does it take to complete the course?

The total duration for the video is approximately 2 hours. We would recommend to attend this course over 3 to 5 weeks, and we suggest spending 30 min to 1h per week. We also recommend to take electronic or written notes while watching our videos to make the most of our lectures.

 

Q7: Is this course for beginners or for more advanced attendees?

This course is for both. The introduction is for absolute beginners in finance, the parts 3 and 4 are more advanced and part 5 is for the most advanced attendees.

 

Q8: Is this course available in other languages?

We only provide an English version although we will also make available subtitles in French.

 

Q9: For attendees who want to know more do you provide more advanced references?

For more advanced attendees we first provide technical references available in the “Bibliography” tab. We also provide a small list of books sorted by specific subjects in Market Microstructure.

Free