FIN 602: Trading and Exchanges

Traditional asset pricing theory and investment analysis treat the process of price formation as a black box. The actual structure of financial markets does not play a role, and frictions and transaction costs are disregarded. These issues, and market liquidity in particular, are of enormous practical importance. This is evidenced by the great attention regulators pay to issues of financial market structure (e.g. the MiFID directive of the EU), as well as by the attention market participants pay to trading costs. In recent years, many new markets have been created in an attempt to reduce transaction costs (e.g. the ATS in the US or Chi-X and Turquoise in Europe). The branch of financial economics that deals with these issues is called market microstructure. This course provides an introduction into the theoretical and empirical foundations of market microstructure.

Learning outcomes
This course familiarizes students with the institutional setting of today’s securities markets. They will know how an exchange operates and what the distinguishing features and theoretical foundations of auction and dealer markets are. They will be able to understand and apply measures of market quality and liquidity. They will further understand how asset characteristics, risk aversion and asymmetric information affect the process of price formation and market liquidity.

Necessary prerequisites

Recommended prerequisites
Module FIN 500; Students should have a sound background in finance. They should be familiar with the different types of securities (stocks, bonds, derivatives), with modern investment analysis and the efficient markets hypothesis. They should also have basic knowledge in statistics and econometrics (unconditional and conditional expected values and variances, regression analysis and hypothesis testing).

Forms of teaching and learningContact hoursIndependent study time
Lecture2 SWS9 SWS
Exercise class1 SWS5 SWS
ECTS credits6
Graded yes
Form of assessmentWritten exam (60 min)
Restricted admissionno
Further information
Performing lecturer
Prof. Dr. Erik Theissen
Prof. Dr. Erik Theissen
Frequency of offeringFall semester
Duration of module 1 semester
Range of applicationM.Sc. MMM, M.Sc. WiPäd, M.Sc. VWL, M.Sc. Wirt. Inf., M.Sc. Wirt. Math., MAKUWI
Preliminary course work
LiteratureAngel, J., L. Harris and Ch. Spatt (2011): Equity Trading in the 21st Century. Quarterly Journal of Finance 1, 1–53.
De Jong, F. and B. Rindi (2009): The Microstructure of Financial Markets. Cambridge University Press.
Foucault, T., M. Pagano and A. Röell (2013): Market Liquidity. Oxford University Press.
Harris, L. (2003): Trading and Exchanges: Market Microstructure for Practitioners. Oxford University Press.
Harris, L. (2015): Trading and Electronic Markets: What Investment Professionals Need to Know. CFA Institute Research Foundation 2015–3, Chapters 5 and 6. Available at
Course outlineIntroduction: The Functions of Asset Markets
Traders, Instruments, and Markets (Market and order types, short selling, derivatives trading, „trade facilitators“, the post-trade industry, blockchain-based clearing and settlement)
Market Design: The Big Picture (Call and continuous markets, dealer and auction markets, hybrid markets, crossing networks)
Some Theory (Inventory- and information-based model of dealer markets, the Kyle (1985) model of single auction trading)
Measures of Market Quality (Measures of liquidity and price informativeness)
Market Design Issues (Designated market makers, transparency, crashes and circuit breakers)
Competition and Regulation (Current regulatory regimes in the EU and the US; competition and fragmentation, make/take fees)
High Frequency Trading (Definition and types, theory, empirical evidence, regulatory responses)
Applications to Asset Management, Asset Pricing and Corporate Finance (only if time permits)