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Market Microstructure

Sergey Zhuk

Course Description

The course provides an introduction into the price discovery in real financial markets. In financial modeling we usually assume that markets are perfect. The equilibrium price reflects a fair valuation of an asset’s expected payoff and exact trading mechanics is irrelevant. Real markets though are far from perfect.  Various frictions could lead to significant deviations of the transaction prices from the theoretical equilibrium values. In the course we will study how trading is organized at the major financial markets (NYSE, NASDAQ, OTC markets and
others) and how prices are determined. An important subject of the course is the concept of liquidity. Liquid markets are those in which prices are close to perfect equilibrium values. We will talk about what it means for markets to be liquid and what determines market liquidity. We will discuss why some markets
are more liquid than the others and why liquidity changes over time; how  market liquidity is related to asset valuations and to corporate investment. The course considers specific institutions and involves some work with real financial data. However, the main focus of the course is not on particular institutional details of the trading process, but on the main economic mechanisms that govern markets’ behavior.

This course is held 4 hours per week. It is held in English and all examinations are in English. It is a required course for a specialization (KFK) in Financial Markets. The course also counts as an elective for specializations (KFK) in Corporate Finance and Financial Services.


A basic knowledge of financial markets and microeconomic theory is required. Some prior knowledge in statistics, probability theory and econometrics will be very useful. I will assume that you took Principles of Finance, and that you are currently taking (or took before) Empirical Finance (040514).


Topics of the Course

1. Market Structure and Trading Mechanisms
2. The Concept of Liquidity. Measuring Liquidity
3. Determinants of Market Liquidity
  a. Transactions Costs and Inventory Models
  b. Models of Asymmetric Information
4. Empirical Models of Market Microstructure
5. Models of the Limit Order Book
6. Liquidity and Asset Prices
7. Liquidity, Price Discovery, and Corporate Policy
8. Market Design and Regulation
  a. Market Fragmentation
  b. Transparency
9. High Frequency Trading


• Frank de Jong, Barbara Rindi: “the Microstructure of Financial Markets”, 2009
• Joel Hasbrouck: “Empirical Market Microstructure”, 2007
• Maureen O'Hara: “Market Microstructure Theory”, 1998
• Barry Johnson: “Algorithmic Trading and DMA”, 2010
• Larry Harris: “Trading and Exchanges”, 2002

Institut für Finanzwirtschaft
Fakultät für Wirtschaftswissenschaften
Universität Wien

Oskar-Morgenstern-Platz 1
1090 Wien
T: +43-1-4277-38262
F: +43-1-4277-838262
Universität Wien | Universitätsring 1 | 1010 Wien | T +43-1-4277-0