Financial Markets and Trading: An Introduction to Market Microstructure and Trading Strategies

Preface

The idea of writing this book came to me as a result of conversations with participants of meetings on quantitative finance and algorithmic trading, and with several generations of students doing internships in my group. I realized that there was a need for a single book that describes how modern financial markets work and what professional trading is about—a book devoted to the market microstructure and trading strategies.

The market microstructure theory has been an established field in finance. It has been thoroughly described in the graduate-level courses by O'Hara (1995), Hasbrouck (2007), and de Jong & Rindi (2009). Also, Harris (2002) has offered a detailed account on financial markets for practitioners. In the last decade, the landscape in this field has dramatically changed due to revolutionary changes in trading technology and the proliferation of electronic order-driven markets. The first goal of this book is to offer an overview of modern financial markets and the theoretical concepts of the market microstructure.

Trading is a process closely interwoven with the market microstructure. Indeed, in O'Hara's (1995) pioneering monograph, the market microstructure is defined in the following way: “While much of economics abstracts from the mechanics of trading, microstructure theory focuses on how specific trading mechanisms affect the price formation process.” According to Harris (2002), market microstructure is “a branch of financial economics that investigates ...