FINS4792 Microstructure of Markets - 2020

Term 1
6 Units of Credit
On Campus
Banking & Finance
The course outline is not available for current semester. To view outlines from other year and/or semesters visit the archives

1. Course Details

Summary of Course

This postgraduate course critically evaluates models of financial markets (market microstructure) and examines how asset prices are established in actual markets such as the stock exchange based on actual trades. It differs from asset pricing theory in which prices are assumed to be set such that supply and demand are equated via some costless auction-type frictionless mechanism that remains an undisclosed ‘black box’. Actual markets require actual rules and these rules affect the way in which prices are established, the way in which information possessed by traders is incorporated into asset prices, why some markets and stocks are liquid and why some markets are more fragile and costly than others.

While this course is based on a relatively-new excellent text by three leading lights in the field, it is supplemented by a number of state-of-the-art studies that significantly advance our understanding of the role of different types of risk-volatility and illiquidity-in determining asset prices and the equity premium, for example, why it is that households can outperform professional investors?, how information contained in the stock price enables boards and CEOs to be monitored, and the role of counterparty transparency in improving market efficiency. Many of these papers are written by or with former students in the course.

It first presents the basic modelling and tools used in the market microstructure field which analyses how prices are established in securities markets and whether or not markets are liquid. The course then analyses components of market design such as transparency and fragmentation (maker-taker fee structures and inverted markets, how investor heterogeneity leads to the (false?) rejection of asset pricing models, and how market design affects asset prices and corporate performance. This market microstructure course helps to address many of these fundamental issues, as well as equip students to read, understand and apply the rapidly developing market microstructure field in areas such as merchant banking. The goal of the course is to establish perspectives, approaches, tools and methods of independent thinking, analysis, and problem solving. Topics include exchange design rules, transparency and opacity, asymmetric information, private information, liquidity provision and pricing, volatility, transaction costs, strategic and noise trading, algorithmic trading, information and trading profits, dark pools, liquidity and returns. Three groups of traders are considered: domestic and foreign institutions and households. Households can be clients of either ‘full-service’ brokers or ‘discount’ brokers.

This course complements courses in asset pricing that students may have done or be doing. Analysis of microstructure is becoming increasingly relevant for research in corporate finance, as well, for example, FINS5576 and FINS5577: Advanced Topics in Asset Pricing and Advanced Topics in Corporate Finance.

Teaching Times and Locations

Please note that teaching times and locations are subject to change. Students are strongly advised to refer to the Class Timetable website for the most up-to-date teaching times and locations.

View course timetable

Course Policies & Support

Course Aims and Relationship to Other Courses

​The goal of the course is to establish perspectives, approaches, tools and methods of independent thinking, analysis, and problem solving. Topics include exchange design rules, transparency and opacity, asymmetric information, private information, liquidity provision and pricing, volatility, transaction costs, strategic and noise trading, algorithmic trading, information and trading profits, dark pools, liquidity and returns.

Three groups of traders are considered: domestic and foreign institutions and households. Households can be clients of either ‘full-service’ brokers or ‘discount’ brokers. This course complements courses in asset pricing that you may have done, or be doing. Analysis of microstructure is becoming increasingly relevant for research in corporate finance, as well, for example, FINS5576 and FINS5577: Advanced Topics in Asset Pricing and Advanced Topics in Corporate Finance.

2. Staff Contact Details

Position Title Name Email Location Phone Consultation Times
Lecturer-in-chargeProfPeter Swan AO FRSN FASSARoom 334, UNSW Business School - Ref E12+61 2 9385 5871Wednesday 2:00–3:00pm & by appointment

You find my office in the UNSW Business School building, Room 334, in the central section. Please use the West wing elevator, find the phone pad next to the glass door, hit the key # and dial my extension: 55871. I’ll come to open the door for you.

Communication with staff

Students with questions regarding course administration or contents are encouraged to:

  • ask me during the class (or after for non-content issues)
  • contact me during the consultation hours for content issues
  • email me (for non-content issues)
  • check the course Web site on Moodle

3. Learning and Teaching Activities

Approach to Learning and Teaching in the Course

The course provides the theoretical underpinnings of modern market microstructure and its applications. The course emphasizes fundamental understanding and full construction of methods and applications of market microstructure theory. This will be done in class and with students as an integral part of this process.

The course consists of weekly three-hour lectures. Presentations and discussions of solutions to posed problems are part of the lectures. Readings will introduce students to the problems that will be presented in the next class lectures. After class they will clarify open questions and deepen the subject. Students will study book sections and articles that will not be covered in class lectures. A major group project is fundamental to learning outcomes in the course. Students will be encouraged to learn SAS, STATA, R, PYTHON, and other programming languages to assist then with setting up and analysing their microstructure trade by trade data bases. Microstructure theory will help provide them with hypotheses to test with their datasets that can either be acquired by the group or supplied by the instructor. The group project can be thought of as a preparatory dummy run for part of their Honours or PhD thesis.

In order to obtain the potential benefit from the course, fulfil the course requirements, and succeed in the exams, assignments, and projects, students are required to follow the points below.

  1. Read the respective textbook chapters and other related readings before class lectures. This will make the class material easier to follow and comprehend.
  2. Attend class lectures (arrive on time).
  3. Actively participate in class: answer the instructors’ questions, and ask your own questions.
  4. After class lectures, study the lecture material, preferably in groups. Individually solve and submit the weekly homework problems.
  5. If issues from last lectures are still not clear, ask your questions or email them to the instructor.

The rational for the above suggestions and requirements in following the above points is that it is necessary to achieve the learning outcomes specified in the Student Learning Outcomes section of this course outline.

Learning Activities and Teaching Strategies

Readings will introduce students to issues and subject matters. Class lectures will define, analyse and resolve issues and raise subsequent ones. Students will study the text book and other readings, attend lectures, participate in class lectures, solve problems from the book, perform other assignments, do projects individually and in groups, and make presentations individually and in groups. Students will study book sections and articles that will not be covered in class lectures. Class discourse will play an essential role. The course is designed to increase your critical thinking skills and encourages you to acquire ideas yourself rather than rely on “authority”. Some very controversial new theories will be presented and explored. These new theories potentially overthrow recent articles in major journals by some of the world's top theorists.

5. Course Resources

Required textbook and readings

  • Thierry Foucault, Marco Pagano and Ailsa Roell, Market Liquidity: Theory, Evidence and Policy, Oxford University Press, Oxford, 2013.
  • There are both hardcover and kindle editions.

Additional readings are set out below and additional ones will be assigned in class lectures.

Additional books

Supplementary reading will be provided via Moodle. The website for this course is on Moodle.

  • FINS4792-Microstructure of Markets - Term 1, 2019
  • FINS5593-Microstructure of Markets - Term 1, 2019

6. Course Evaluation & Development

Feedback is regularly sought from students and continual improvements are made based on this feedback. At the end of this course, you will be asked to complete the myExperience survey, which provides a key source of student evaluative feedback. Your input into this quality enhancement process is extremely valuable in assisting us to meet the needs of our students and provide an effective and enriching learning experience. The results of all surveys are carefully considered and do lead to action towards enhancing educational quality.

7. Course Schedule

Note: for more information on the UNSW academic calendar and key dates including study period, exam, supplementary exam and result release, please visit:
Week Activity Topic Assessment/Other
Week 1: 17 FebruaryLecture

Mon 18-21 (w1-8,10-11, BUS 232)

Introduction: basics What kinds of risks are priced: Volatility risk or Illiquidity?

Discussion Thu 6:00-7:00pm (w1,4,8,10, SEB G02)

  • FPR Ch.1 and Problem Set 1 (due Week 2)
  • Pallab Dey and Peter L. Swan, “Is Illiquidity ever Priced? Theory and Evidence." UNSW Working Paper, 2019.
Week 2: 24 FebruaryLecture

Trading mechanisms Role of informed trading in monitoring the CEO. Measuring liquidity  

  • FPR Ch.2 and Problem Set 2 (due Week 3)
  • Swan, Peter L. Are "High-Powered" Incentives only Required when the "Signal-to-Noise" Ratio is Weak?, UNSW Working Paper, 2020
Week 3: 2 MarchLecture

Measuring liquidity Why transparent markets improve liquidity and pricing efficiency

Price dynamics and liquidity I

  • FPR Ch.3 and Problem Set 3 (due Week 4)
  • Juliane D. Krug, Peter L. Swan, and Joakim Westerholm, 2019, Who benefits from broker ID disclosure? Working paper, UNSW.
  • Discussion Thu 6:00-7:00pm (w4, SEB G02)
Week 4: 9 MarchLecture

Do households outperform professional investors?

  • FPR Ch.4 and Problem Set 4 (due Week 5)
  • Wei Lu, Peter L. Swan, and Joakim Westerholm, “Other People’s Money”: The Trading Performance of Household Investors vs. Delegated Money Managers.

Discussion: Thu 6:00-7:00 pm (w4, SEB G02)

Week 5: 16 MarchLecture

Price dynamics and liquidity II

  • FPR Ch. 5 and Problem Set 5 (due Week 6)
  • Yiping Lin, Peter L. Swan, and Frederick H. deB. Harris, 2020, A Model of Maker-Taker Fees and Quasi-Natural Experimental Evidence. Working Paper.


Week 6: 23 MarchLecture and test

Empirical analyses I

  • FPR Ch.7 and Problem Set 6 (due Week 7)

Midterm Multiple Choice Test: Thu 6:00-7:30 pm (w6, SEB G02)

Week 7: 30 March Lecture

Empirical analyses II

  • FPR Ch.7 and Problem Set 7 (due Week 8)
Week 8: 6 AprilLecture


  • FPR Ch. 8 and Problem Set 8. (due Week 9)
  • Project draft due and oral presentations commence
  • Discussion: Thu 6:00-7:00 pm (w8, SEB G02)
Week 9: 13 AprilLecture

No Class: Public Holiday

Week 10: 20 AprilLecture

Liquidity and asset prices

  • FPR Ch.9 and Problem Set 9 (due Week 11)
  • Revision: Thu 6:00-7:00 pm (w10, SEB G02)
Week 11: 27 April

Liquidity and corporate finance

FPR Ch. 12 Completed project submission Revision FPR Ch. 13 Summary of class participation over term to be submitted

Exams: 4 May
Exams: 11 May

8. Policies and Support

Information about UNSW Business School protocols, University policies, student responsibilities and education quality and support.

Program Learning Outcomes

The Business School places knowledge and capabilities at the core of its curriculum via seven Program Learning Outcomes (PLOs). These PLOs are systematically embedded and developed across the duration of all coursework programs in the Business School.

PLOs embody the knowledge, skills and capabilities that are taught, practised and assessed within each Business School program. They articulate what you should know and be able to do upon successful completion of your degree.

Upon graduation, you should have a high level of specialised business knowledge and capacity for responsible business thinking, underpinned by ethical professional practice. You should be able to harness, manage and communicate business information effectively and work collaboratively with others. You should be an experienced problem-solver and critical thinker, with a global perspective, cultural competence and the potential for innovative leadership.

All UNSW programs and courses are designed to assess the attainment of program and/or course level learning outcomes, as required by the UNSW Assessment Design Procedure. It is important that you become familiar with the Business School PLOs, as they constitute the framework which informs and shapes the components and assessments of the courses within your program of study.

PLO 1: Business knowledge

Students will make informed and effective selection and application of knowledge in a discipline or profession, in the contexts of local and global business.

PLO 2: Problem solving

Students will define and address business problems, and propose effective evidence-based solutions, through the application of rigorous analysis and critical thinking.

PLO 3: Business communication

Students will harness, manage and communicate business information effectively using multiple forms of communication across different channels.

PLO 4: Teamwork

Students will interact and collaborate effectively with others to achieve a common business purpose or fulfil a common business project, and reflect critically on the process and the outcomes.

PLO 5: Responsible business practice

Students will develop and be committed to responsible business thinking and approaches, which are underpinned by ethical professional practice and sustainability considerations.

PLO 6: Global and cultural competence

Students will be aware of business systems in the wider world and actively committed to recognise and respect the cultural norms, beliefs and values of others, and will apply this knowledge to interact, communicate and work effectively in diverse environments.

PLO 7: Leadership development

Students will develop the capacity to take initiative, encourage forward thinking and bring about innovation, while effectively influencing others to achieve desired results.

These PLOs relate to undergraduate and postgraduate coursework programs.  Separate PLOs for honours and postgraduate research programs are included under 'Related Documents'.

Business School course outlines provide detailed information for students on how the course learning outcomes, learning activities, and assessment/s contribute to the development of Program Learning Outcomes.



UNSW Graduate Capabilities

The Business School PLOs also incorporate UNSW graduate capabilities, a set of generic abilities and skills that all students are expected to achieve by graduation. These capabilities articulate the University’s institutional values, as well as future employer expectations.

UNSW Graduate CapabilitiesBusiness School PLOs
Scholars capable of independent and collaborative enquiry, rigorous in their analysis, critique and reflection, and able to innovate by applying their knowledge and skills to the solution of novel as well as routine problems.
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 7: Leadership development

Entrepreneurial leaders capable of initiating and embracing innovation and change, as well as engaging and enabling others to contribute to change
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 6: Global and cultural competence
  • PLO 7: Leadership development

Professionals capable of ethical, self-directed practice and independent lifelong learning
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 5: Responsible business practice

Global citizens who are culturally adept and capable of respecting diversity and acting in a socially just and responsible way.
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 5: Responsible business practice
  • PLO 6: Global and cultural competence

While our programs are designed to provide coverage of all PLOs and graduate capabilities, they also provide you with a great deal of choice and flexibility.  The Business School strongly advises you to choose a range of courses that assist your development against the seven PLOs and four graduate capabilities, and to keep a record of your achievements as part of your portfolio. You can use a portfolio as evidence in employment applications as well as a reference for work or further study. For support with selecting your courses contact the UNSW Business School Student Centre.

Academic Integrity and Plagiarism

Academic Integrity is honest and responsible scholarship. This form of ethical scholarship is highly valued at UNSW. Terms like Academic Integrity, misconduct, referencing, conventions, plagiarism, academic practices, citations and evidence based learning are all considered basic concepts that successful university students understand. Learning how to communicate original ideas, refer sources, work independently, and report results accurately and honestly are skills that you will be able to carry beyond your studies.

The definition of academic misconduct is broad. It covers practices such as cheating, copying and using another person’s work without appropriate acknowledgement. Incidents of academic misconduct may have serious consequences for students.


UNSW regards plagiarism as a form of academic misconduct. UNSW has very strict rules regarding plagiarism. Plagiarism at UNSW is using the words or ideas of others and passing them off as your own. All Schools in the Business School have a Student Ethics Officer who will investigate incidents of plagiarism and may result in a student’s name being placed on the Plagiarism and Student Misconduct Registers.

Below are examples of plagiarism including self-plagiarism:

Copying: Using the same or very similar words to the original text or idea without acknowledging the source or using quotation marks. This includes copying materials, ideas or concepts from a book, article, report or other written document, presentation, composition, artwork, design, drawing, circuitry, computer program or software, website, internet, other electronic resource, or another person's assignment, without appropriate acknowledgement of authorship.

Inappropriate Paraphrasing: Changing a few words and phrases while mostly retaining the original structure and/or progression of ideas of the original, and information without acknowledgement. This also applies in presentations where someone paraphrases another’s ideas or words without credit and to piecing together quotes and paraphrases into a new whole, without appropriate referencing.

Collusion: Presenting work as independent work when it has been produced in whole or part in collusion with other people. Collusion includes:

  • Students providing their work to another student before the due date, or for the purpose of them plagiarising at any time
  • Paying another person to perform an academic task and passing it off as your own
  • Stealing or acquiring another person’s academic work and copying it
  • Offering to complete another person’s work or seeking payment for completing academic work

Collusion should not be confused with academic collaboration (i.e., shared contribution towards a group task).

Inappropriate Citation: Citing sources which have not been read, without acknowledging the 'secondary' source from which knowledge of them has been obtained.

Self-Plagiarism: ‘Self-plagiarism’ occurs where an author republishes their own previously written work and presents it as new findings without referencing the earlier work, either in its entirety or partially. Self-plagiarism is also referred to as 'recycling', 'duplication', or 'multiple submissions of research findings' without disclosure. In the student context, self-plagiarism includes re-using parts of, or all of, a body of work that has already been submitted for assessment without proper citation.

To see if you understand plagiarism, do this short quiz:


The University also regards cheating as a form of academic misconduct. Cheating is knowingly submitting the work of others as their own and includes contract cheating (work produced by an external agent or third party that is submitted under the pretences of being a student’s original piece of work). Cheating is not acceptable at UNSW.

If you need to revise or clarify any terms associated with academic integrity you should explore the 'Working with Academic Integrity' self-paced lessons available at:

For UNSW policies, penalties, and information to help you avoid plagiarism see: as well as the guidelines in the online ELISE tutorials for all new UNSW students: For information on student conduct see:

For information on how to acknowledge your sources and reference correctly, see: If you are unsure what referencing style to use in this course, you should ask the lecturer in charge.

Student Responsibilities and Conduct

​Students are expected to be familiar with and adhere to university policies in relation to class attendance and general conduct and behaviour, including maintaining a safe, respectful environment; and to understand their obligations in relation to workload, assessment and keeping informed.

Information and policies on these topics can be found on the 'Managing your Program' website.


It is expected that you will spend at least ten to twelve hours per week studying for a course except for Summer Term courses which have a minimum weekly workload of twenty to twenty four hours. This time should be made up of reading, research, working on exercises and problems, online activities and attending classes. In periods where you need to complete assignments or prepare for examinations, the workload may be greater. Over-commitment has been a cause of failure for many students. You should take the required workload into account when planning how to balance study with employment and other activities.

We strongly encourage you to connect with your Moodle course websites in the first week of semester. Local and international research indicates that students who engage early and often with their course website are more likely to pass their course.

View more information on expected workload


Your regular and punctual attendance at lectures and seminars or in online learning activities is expected in this course. The Business School reserves the right to refuse final assessment to those students who attend less than 80% of scheduled classes where attendance and participation is required as part of the learning process (e.g., tutorials, flipped classroom sessions, seminars, labs, etc.).

View more information on attendance

General Conduct and Behaviour

You are expected to conduct yourself with consideration and respect for the needs of your fellow students and teaching staff. Conduct which unduly disrupts or interferes with a class, such as ringing or talking on mobile phones, is not acceptable and students may be asked to leave the class.

View more information on student conduct

Health and Safety

UNSW Policy requires each person to work safely and responsibly, in order to avoid personal injury and to protect the safety of others.

View more information on Health and Safety

Keeping Informed

You should take note of all announcements made in lectures, tutorials or on the course web site. From time to time, the University will send important announcements to your university e-mail address without providing you with a paper copy. You will be deemed to have received this information. It is also your responsibility to keep the University informed of all changes to your contact details.

Student Support and Resources

​The University and the Business School provide a wide range of support services and resources for students, including:

Business School EQS Consultation Program
The Consultation Program offers academic writing, literacy and numeracy consultations, study skills, exam preparation for Business students. Services include workshops, online resources, individual and group consultations. 
Level 1, Room 1035, Quadrangle Building.
02 9385 4508

Communication Resources
The Business School Communication and Academic Support programs provide online modules, communication workshops and additional online resources to assist you in developing your academic writing.

Business School Student Centre
The Business School Student Centre provides advice and direction on all aspects of admission, enrolment and graduation.
Level 1, Room 1028 in the Quadrangle Building
02 9385 3189

UNSW Learning & Careers Hub
The UNSW Learning & Careers Hub provides academic skills and careers support services—including workshops, individual consultations and a range of online resources—for all UNSW students. See their website for details.
Lower Ground Floor, North Wing Chancellery Building.
02 9385 2060

Student Support Advisors
Student Support Advisors work with all students to promote the development of skills needed to succeed at university, whilst also providing personal support throughout the process.
John Goodsell Building, Ground Floor.
02 9385 4734

International Student Support
The International Student Experience Unit (ISEU) is the first point of contact for international students. ISEU staff are always here to help with personalised advice and information about all aspects of university life and life in Australia.
Advisors can support you with your student visa, health and wellbeing, making friends, accommodation and academic performance.
02 9385 4734

Equitable Learning Services
Equitable Learning Services (formerly Disability Support Services) is a free and confidential service that provides practical support to ensure that your health condition doesn't adversely affect your studies. Register with the service to receive educational adjustments.
Ground Floor, John Goodsell Building.
02 9385 4734

UNSW Counselling and Psychological Services
Provides support and services if you need help with your personal life, getting your academic life back on track or just want to know how to stay safe, including free, confidential counselling.
Level 2, East Wing, Quadrangle Building.
02 9385 5418

Library services and facilities for students
The UNSW Library offers a range of collections, services and facilities both on-campus and online.
Main Library, F21.
02 9385 2650

Moodle eLearning Support
Moodle is the University’s learning management system. You should ensure that you log into Moodle regularly.
02 9385 3331

UNSW IT provides support and services for students such as password access, email services, wireless services and technical support.
UNSW Library Annexe (Ground floor).
02 9385 1333

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