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

Praise for Financial Markets and Trading
"Anatoly Schmidt has written an extremely useful book that connects academic theories of market structure to their practical implementation on the trading floor. Both groups should benefit from this conversation. Traders will learn the latest theoretical models of dealer and order driven markets. Students will better understand the challenges of producing profitable trading strategies. Readers interested in learning more about the equity, bond, and foreign exchange markets are fortunate to have this comprehensive guide."
—Bruce Mizrach, Associate Professor, Department of Economics, Rutgers University
"I recommend Financial Markets and Trading as the insider′s look at the structure, practices, and conventions of financial markets, especially within the OTC wholesale environment. Anatoly Schmidt does an excellent job in evaluating and applying various theoretical aspects of creating, testing, and implementing trading programs within several markets and asset classes. I plan to use his book in the curriculum of the Financial Engineering Program at Kent State University."
—John Donato, VP, ICAP PLC; Instructor, Kent State MSFE Program
"Alec Schmidt has written an excellent textbook that details the complex workings of 21st–century equity markets. His textbook is unique in combining the theory and practice of market microstructure with an extensive, practitioner–oriented treatment of trading strategies."
—Craig Holden, Professor of Finance, Indiana University

Spis treści:
Preface ix
Acknowledgments xiii
PART ONE
Market Microstructure 1
CHAPTER 1
Financial Markets: Traders, Orders, and Systems 3
Traders 3
Orders 5
The Bid/Ask Spread 7
Liquidity 9
Market Structures 9
Continuous Order–Driven Markets 10
Oral Auctions 11
Call Auctions 12
Quote–Driven Markets and Hybrid Markets 13
CHAPTER 2
Modern Financial Markets 15
The U.S. Equity Markets 15
The NYSE 15
NASDAQ 16
Alternative Trading Systems 17
European Equity Markets 18
Spot FX Market 19
The U.S. Fixed Income Markets 21
High–Frequency Trading 22
CHAPTER 3
Inventory Models 26
Risk–Neutral Models 26
The Garman’s Model 26
Amihud–Mendelson Model 29
Models with Risk Aversion 29
What Is Risk Aversion? 29
The Stoll’s Model 31
CHAPTER 4
Market Microstructure: Information–Based Models 35
Kyle’s Model 35
One–Period Model 35
Multi–Period and Multi–Insider Models 38
Glosten–Milgrom Model 39
Further Developments 41
CHAPTER 5
Models of the Limit–Order Markets 44
The CMSW Model 44
The Parlour Model 46
The Foucault Model 47
Equilibrium at Zero Volatility 48
Volatility Effect 49
New Developments 50
CHAPTER 6
Empirical Market Microstructure 53
Roll’s Model 53
The Glosten–Harris Model 55
Structural Models 56
Recent Empirical Findings 58
Equity Markets 58
Global FX Spot Market 60
PART TWO
Market Dynamics 63
CHAPTER 7
Statistical Distributions and Dynamics of Returns 65
Prices and Returns 65
The Efficient Market Hypothesis 66
Random Walk and Predictability of Returns 68
Recent Empirical Findings 69
Fractals in Finance 72
CHAPTER 8
Volatility 75
Basic Notions 75
Conditional Heteroskedasticity 77
Realized Volatility 79
Market Risk Measurement 81
CHAPTER 9
Agent–Based Modeling of Financial Markets 86
Adaptive Equilibrium Models 87
Non–Equilibrium Price Models 89
The Observable–Variables Model 91
Modeling Efficiency of Technical Trading 94
Modeling the Birth of a Two–Sided Market 95
PART THREE
Trading Strategies 101
CHA PTER 10
Technical Trading Strategies 103
Trend Strategies 105
Filter Rules 105
Moving–Average Rules 106
Channel Breakouts 107
Momentum and Oscillator Strategies 109
Complex Geometric Patterns 113
CHAPTER 11
Arbitrage Trading Strategies 117
Hedging Strategies 118
Pair Trading 120
Cointegration and Causality 121
Pair Selection 123
Arbitrage Risks 125
CHAPTER 12
Back–Testing of Trading Strategies 129
Performance Measures 131
Resampling Techniques 133
Bootstrap 133
Markov Chain Monte Carlo 135
Random Entry Protocol 136
Comparing Trading Strategies 137
Bootstrap Reality Check 138
New Developments 139
CHAPTER 13
Execution Strategies 142
Benchmark–Driven Schedules 143
Cost–Driven Schedules 145
Risk–Neutral Framework 145
Risk–Averse Framework 147
The Taker’s Dilemma 151
The Random Walk Model 153
Simulations of the Execution Costs 154
APPENDIX A
Probability Distributions 156
Basic Notions 156
Frequently Used Distributions 159
The Uniform Distribution 159
The Binomial Distribution 159
The Poisson Distribution 160
The Normal Distribution 160
The Lognormal Distribution 161
The Cauchy Distribution 162
The Gamma Distribution 162
Stable Distributions and Scale Invariance 162
APPENDIX B
Elements of Time Series Analysis 165
The Autoregressive Model 165
The Moving Average Model 167
The ARMA Model 168
Trends and Seasonality 170
Multivariate Time Series 172
Notes 174
References 180
About the Author 190
Index 191

Nota biograficzna:
Dr. Anatoly B. Schmidt holds a master of science and PhD in physics from University of Latvia. He has been working as a quantitative analyst in the financial industry since 1997. Dr. Schmidt has published several papers on agent–based modeling of financial markets, market microstructure, and algorithmic trading as well as a book entitled Quantitative Finance for Physicists: An Introduction. He also teaches in the Financial Engineering Program of Stevens Institute of Technology.

Okładka tylna:
Praise for Financial Markets and Trading
"Anatoly Schmidt has written an extremely useful book that connects academic theories of market structure to their practical implementation on the trading floor. Both groups should benefit from this conversation. Traders will learn the latest theoretical models of dealer and order driven markets. Students will better understand the challenges of producing profitable trading strategies. Readers interested in learning more about the equity, bond, and foreign exchange markets are fortunate to have this comprehensive guide."
—Bruce Mizrach, Associate Professor, Department of Economics, Rutgers University
"I recommend Financial Markets and Trading as the insider′s look at the structure, practices, and conventions of financial markets, especially within the OTC wholesale environment. Anatoly Schmidt does an excellent job in evaluating and applying various theoretical aspects of creating, testing, and implementing trading programs within several markets and asset classes. I plan to use his book in the curriculum of the Financial Engineering Program at Kent State University."
—John Donato, VP, ICAP PLC; Instructor, Kent State MSFE Program
"Alec Schmidt has written an excellent textbook that details the complex workings of 21st–century equity markets. His textbook is unique in combining the theory and practice of market microstructure with an extensive, practitioner–oriented treatment of trading strategies."
—Craig Holden, Professor of Finance, Indiana University