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

Publisher Description

An informative guide to market microstructure and trading strategies Over the last decade, the financial landscape has undergone a significant transformation, shaped by the forces of technology, globalization, and market innovations to name a few. In order to operate effectively in today's markets, you need more than just the motivation to succeed, you need a firm understanding of how modern financial markets work and what professional trading is really about. Dr. Anatoly Schmidt, who has worked in the financial industry since 1997, and teaches in the Financial Engineering program of Stevens Institute of Technology, puts these topics in perspective with his new book. Divided into three comprehensive parts, this reliable resource offers a balance between the theoretical aspects of market microstructure and trading strategies that may be more relevant for practitioners. Along the way, it skillfully provides an informative overview of modern financial markets as well as an engaging assessment of the methods used in deriving and back-testing trading strategies. Details the modern financial markets for equities, foreign exchange, and fixed incomeAddresses the basics of market dynamics, including statistical distributions and volatility of returnsOffers a summary of approaches used in technical analysis and statistical arbitrage as well as a more detailed description of trading performance criteria and back-testing strategiesIncludes two appendices that support the main material in the book If you're unprepared to enter today's markets you will underperform. But with Financial Markets and Trading as your guide, you'll quickly discover what it takes to make it in this competitive field.

Notes

A one-stop introduction to all major aspects of trading.

Back Cover

Financial Markets and Trading Over the last decade, the financial landscape has undergone a significant transformation--shaped by the forces of technology, globalization, and market innovations to name a few. In order to operate effectively in today's markets, you need more than just the motivation to succeed, you need a firm understanding of how modern financial markets work and what professional trading is really about. Nobody understands this better than author Anatoly Schmidt, and in his new book, he puts these topics in perspective by providing you with an informative overview of modern financial markets, and the theoretical concepts of market microstructure, as well as an engaging assessment of the methods used in deriving and back-testing trading strategies. Divided into three comprehensive parts, this reliable resource offers a balance between the theoretical aspects of market microstructure and trading strategies that may be more relevant for practitioners. Part One details the modern financial markets for equities, foreign exchange, and fixed income--starting with an introduction to various types of traders, orders, and market structures and then presenting the major market microstructure models. Some important empirical properties of modern equity and foreign exchange markets are also described. Part Two addresses the basics of market dynamics, including statistical distributions, dynamics, and volatility of returns--discussing the efficient market hypothesis and possible predictability of returns as well as introducing the concepts of agent-based modeling of financial markets. Part Three is devoted entirely to trading, and offers a summary of approaches used in technical analysis and statistical arbitrage as well as a more detailed description of trading performance criteria and back-testing strategies. Ideas used in optimal order execution, such as optimal order slicing and the taker's dilemma, are also examined. Two appendices are also included to support the main material in this book. Appendix A provides reference material on basic statistical notions and statistical distributions that are frequently used in finance. And Appendix B describes the main concepts of time series analysis: autoregressive and moving average models, trends and seasonality, and multivariate models. If you're unprepared to enter today's markets you will underperform. But with Financial Markets and Trading as your guide, you'll quickly discover what it takes to make it in this competitive field.

Flap

Financial Markets and Trading Over the last decade, the financial landscape has undergone a significant transformation--shaped by the forces of technology, globalization, and market innovations to name a few. In order to operate effectively in today's markets, you need more than just the motivation to succeed, you need a firm understanding of how modern financial markets work and what professional trading is really about. Nobody understands this better than author Anatoly Schmidt, and in his new book, he puts these topics in perspective by providing you with an informative overview of modern financial markets, and the theoretical concepts of market microstructure, as well as an engaging assessment of the methods used in deriving and back-testing trading strategies. Divided into three comprehensive parts, this reliable resource offers a balance between the theoretical aspects of market microstructure and trading strategies that may be more relevant for practitioners. Part One details the modern financial markets for equities, foreign exchange, and fixed income--starting with an introduction to various types of traders, orders, and market structures and then presenting the major market microstructure models. Some important empirical properties of modern equity and foreign exchange markets are also described. Part Two addresses the basics of market dynamics, including statistical distributions, dynamics, and volatility of returns--discussing the efficient market hypothesis and possible predictability of returns as well as introducing the concepts of agent-based modeling of financial markets. Part Three is devoted entirely to trading, and offers a summary of approaches used in technical analysis and statistical arbitrage as well as a more detailed description of trading performance criteria and back-testing strategies. Ideas used in optimal order execution, such as optimal order slicing and the taker's dilemma, are also examined. Two appendices are also included to support the main material in this book. Appendix A provides reference material on basic statistical notions and statistical distributions that are frequently used in finance. And Appendix B describes the main concepts of time series analysis: autoregressive and moving average models, trends and seasonality, and multivariate models. If you're unprepared to enter today's markets you will underperform. But with Financial Markets and Trading as your guide, you'll quickly discover what it takes to make it in this competitive field.

Table of Contents

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 Chapter 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

Review

"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

Long Description

Financial Markets and Trading Over the last decade, the financial landscape has undergone a significant transformation shaped by the forces of technology, globalization, and market innovations to name a few. In order to operate effectively in todays markets, you need more than just the motivation to succeed, you need a firm understanding of how modern financial markets work and what professional trading is really about. Nobody understands this better than author Anatoly Schmidt, and in his new book, he puts these topics in perspective by providing you with an informative overview of modern financial markets, and the theoretical concepts of market microstructure, as well as an engaging assessment of the methods used in deriving and back-testing trading strategies. Divided into three comprehensive parts, this reliable resource offers a balance between the theoretical aspects of market microstructure and trading strategies that may be more relevant for practitioners. Part One details the modern financial markets for equities, foreign exchange, and fixed income starting with an introduction to various types of traders, orders, and market structures and then presenting the major market microstructure models. Some important empirical properties of modern equity and foreign exchange markets are also described. Part Two addresses the basics of market dynamics, including statistical distributions, dynamics, and volatility of returns discussing the efficient market hypothesis and possible predictability of returns as well as introducing the concepts of agent-based modeling of financial markets. Part Three is devoted entirely to trading, and offers a summary of approaches used in technical analysis and statistical arbitrage as well as a more detailed description of trading performance criteria and back-testing strategies. Ideas used in optimal order execution, such as optimal order slicing and the takers dilemma, are also examined. Two appendices are also included to support the main material in this book. Appendix A provides reference material on basic statistical notions and statistical distributions that are frequently used in finance. And Appendix B describes the main concepts of time series analysis: autoregressive and moving average models, trends and seasonality, and multivariate models. If youre unprepared to enter todays markets you will underperform. But with Financial Markets and Trading as your guide, youll quickly discover what it takes to make it in this competitive field.

Review Text

"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

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