Introduction to Market Microstructure < Back to MOOC Home / ILB Mooc / ILB Mooc / Introduction to Market Microstructure 562 students Overview and enrollment Curriculum Instructors Review from academics Sources Bibliography FAQ 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 3 Part 1: Fragmentation and Liquidity in European Markets Part 2: Introduction to the orderbook Introduction: test 4 questions I. European markets fragmentation and liquidity 3 Part 1: European markets fragmentation and liquidity Part 2: Turnover, volumes and spreads European markets fragmentation and liquidity: test 4 questions II. Key practical questions from an investor's point of view 4 Part 1: Key practical questions from an investor’s point of view Part 2: Main types of trading, trading algorithms Part 3: How to measure the performances of trading algorithms Key practical questions from an investor’s point of view: test 6 questions III. Key orderbook properties 5 Part 1: Orderbook properties: How bid-ask spreads, turnover, available sizes and volatility relate together Part 2: Orderbook properties: How bid-ask spreads, turnover, available volumes and volatility relate together Part 3: Orderbook properties: Average Trade Size and Turnover, Bid-Ask spreads and Turnover Part 4: Orderbook properties: Bid-Ask spreads and Volatility, First limit sizes and Turnover Key orderbook properties: test 4 questions IV. Market fragmentation and competition across venues 4 Part 1: Market fragmentation: How does market fragmentation relate to the characteristics of the orderbooks across different venues? Part 2: Market fragmentation: Fragmentation, relative number of trades and relative average trade sizes Part 3: Market fragmentation: Fragmentation, relative available sizes and relative bid-ask spreads Market fragmentation and competition across venues: test 4 questions V. Key forecast based on the orderbook 5 Part 1: Key forecast based on the orderbook: Which data for which forecasting horizon? Part 2: Key forecast based on the orderbook: Using the orderbook imbalance to forecast the next trade side Part 3: Key forecast based on the orderbook: Forecasting the next trade’s orderbook after an agressive buy Part 4: Key forecast based on the orderbook: Future price profile after an agressive trade on a given venue Key forecast based on the orderbook: test 5 questions Instructors 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 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 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 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, Quantitative R&D Lead at Abu Dhabi Investment Authority (ADIA) “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 Enroll