Course Unit Page


This teaching activity contributes to the achievement of the Sustainable Development Goals of the UN 2030 Agenda.

No poverty Quality education Decent work and economic growth Peace, justice and strong institutions

Academic Year 2019/2020

Learning outcomes

This course teaches the theory of financial market microstructure, that is how asset prices are formed as a direct result of explicit trading rules. It also analyzes how different regulatory settings impact on the dynamic price mechanisms. A special attention is devoted to trading systems on stock exchanges and other financial markets. The role of algorithmic trading is explicitly taken into account in the light of the recent regulatory evolution. At the end of the course, students understand the determinants of transaction costs and the dynamics of prices, quotes and volumes.

Course contents

The course aims to provide students with the basic knowledge about microstructure concepts. The focus is on both institutional details (the organization of the most important financial markets) and on technical aspects.

In general, our goal is to analyze the characteristics of market and trade behavior, taking into specific account the impact of new technologies on market structure and microstructure. We examine the interaction of technology and regulation and its effect on market structure and on traders' behavior.

Specifically, we analyze the role of investors, brokers, dealers, arbitrageurs, retail traders, buy-side traders, day traders, rogue traders and gamblers. We study the different types of orders: limit orders, market orders, stop orders. Some aspects related with insider trading, front running and market manipulation are also explored, together with the recent phenomena of dark pools. Special attention will be dedicated to High Frequency Trading and Algo Trading and Optimal Execution Strategies, given their massive importance in the recent evolution of financial markets.

The course is divided in two modules. Module I concentrates on institutional aspects. Module II deals with the technical aspects.

Module I (Prof. Emanuela Carbonara)

  1. Financial instruments and trading mechanisms
  2. Limit-order markets and dealer markets
  3. Defining and measuring market liquidity
  4. The role of information in financial markets
  5. Price dynamics and market depth
  6. Institutions and market structure

Module II (Prof. Massimiliano Marzo)

  1. Fragmentation vs. Consolidation in practice: Dark Pools, Smart Order Routing, Crossing Networks.
  2. Transaction Costs analysis: i) Pre-trade and post trade analysis; (ii) Implementation Shortfall and all subsequent variants.
  3. Placing orders 2: (i) Price formation; (ii) price discovery; (iii) Inventory Management.
  4. Execution tactics: (i) Impact driven; (ii) Opportunistic; (iii) Price/risk driven.
  5. Algorithmic Trading and High Frequency Trading and its impact on the structure of financial markets.


The primary textbook references are:

1. Thierry Foucault, Marco Pagano, Ailsa Roell, "Market Liquidity: Theory, Evidence, and Policy", Oxford University Press, 2013. (FPR 2013 - selected chapters)

2. Frank de Jong and Barbara Rindi, "The microstructure of financial markets", Cambridge University Press, 2009. (dJR 2009 - selected chapters)

3. John C. Hull, "Options, Futures and Other Derivatives", 10th ed., Pearson, 2018 (H2018 - selected chapters)

4. Joel Hasbrouck, "Empirical Microstructure Models", Oxford University Press, 2007 (H2007 - selected chapters)

Other material:

Lecture notes

Additional references may be provided during the course.

Teaching methods

Each class is organized in two distinct parts: in the first part an overview of the topic is given by the instructor. In the second part there will be active class discussion.

Class participation is crucial. A detailed schedule with lesson by lesson reading assignments will be provided at the beginning of the course. Students are expected to read the material and participate to the class discussion.

Assessment methods

1.Class participation (10%), assessing the ability to discuss the material and to ask relevant questions.

2. Written exam (counting for 90% of the final grade). A 2-hour, closed-book written examination, testing the theoretical knowledge acquired during the course.

The exam consists of 4 open questions on the material covered in class (2 for Module I and 2 for Module II). Each question is worth a maximum of 8 points and the whole exam is worth a total of 32 points maximum. Students with 31 or 32 points get a "30 cum laude" mark.

Non programmable calculators are allowed during the exam. However, no substitutes (cell phones, tablets or similar) are permitted. Students are allowed to bring a single, one-sided sheet (A5 size) containing formulas for their exclusive use.

Teaching tools


Links to further information


Office hours

See the website of Emanuela Carbonara

See the website of Massimiliano Marzo