FINS4792 Microstructure of Markets - 2018

Subject Code
Study Level
Commencing Term
Semester 1
Total Units of Credit (UOC)
Delivery Mode
On Campus
Banking & Finance

1. Course Details

Summary of Course

This course studies models of financial markets (market microstructure), and in particular, 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.

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
LecturerProfPeter 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, 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 overthrow recent articles in major journals by 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

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 - Semester 1, 2018
  • FINS5593-Microstructure of Markets - Semester 1, 2018

6. Course Evaluation & Development

​Each year feedback is sought from students and other stakeholders about the courses offered in the School and continual improvements are made based on this feedback. UNSW's myExperience survey is one of the ways in which student evaluative feedback is gathered. In this course, we will seek your feedback through end of semester myExperience responses.

7. Course Schedule

Week 1: 26 Feb



Introduction: basics

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


  • FPR Ch.1 and Problem Set 1 (due Week 2)
  • Peter L. Swan, “Investor heterogeneity, Pareto optimality, and the equity premium puzzle. UNSW Working Paper, 2017.

Week 2: 05 Mar



Trading mechanisms

Role of informed trading in monitoring the CEO.


  • FPR Ch.2 and Problem Set 2 (due Week 3)
  • Swan, Peter L. Why Do Large Stocks Thrive Despite the Predictions of Agency Theorists? 2018, UNSW Working Paper.

Week 3: 12 Mar



Measuring liquidity

Why transparent markets improve liquidity and pricing efficiency


  • FPR Ch.3 and Problem Set 3 (due Week 4)
  • Juliane D. Krug, Peter L. Swan, and Joakim Westerholm, 2017, Everybody Wins: Broker ID disclosure and market efficiency, working paper, UNSW.

Week 4: 19 Mar



Price dynamics and liquidity I

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.

Week 5: 26 Mar



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, 2018, Maker-Taker Fee, Liquidity Competition, and High Frequency Trading. Working Paper.

Mid Semester Break: 02 Apr
Week 6: 09 Apr

Lecture + test


Trade size and market depth

Mid-term exam


  • FPR Ch.6 and Problem Set 6 (due Week 7)
  • Mid-term test (in-class)

Week 7: 16 Apr



Empirical analyses I


  • FPR Ch.7 and Problem Set 7 (due Week 9)

Week 8: 23 Apr

Group Project only


(Wednesday 25 April is Anzac Day public holiday so no class this week)

Week 8 (Calendar Week 9): 30 Apr



Empirical analyses II


FPR Ch.8 and Problem Set 8 (due Week 9)

Week 9: 07 May





FPR Ch. 9 and Problem Set 9. (due Week 10)

Project draft due and oral presentations commence

Week 10: 14 May



Liquidity and asset prices


FPR Ch.10 and 11 and Problem Set 10 (due Week 11)

Week 11: 21 May



Liquidity and corporate finance I


  • FPR Ch. 12
  • Completed project submission

Week 12 (Calendar W13): 28 May

Lecture + test


Liquidity and corporate finance II


  • Revision
  • FPR Ch. 13. Final Exam (in class).

8. Policies

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

Program Learning Goals and Outcomes

The Business School Program Learning Goals reflect what we want all students to BE or HAVE by the time they successfully complete their degree, regardless of their individual majors or specialisations. For example, we want all our graduates to HAVE a high level of business knowledge and a sound awareness of ethical, social, cultural and environmental implications of business. As well, we want all our graduates to BE effective problem-solvers, communicators and team participants.

You can demonstrate your achievement of these goals by the specific outcomes you achieve by the end of your degree (i.e. Program Learning Outcomes—henceforth PLOs). These PLOs articulate what you need to know and be able to do as a result of engaging in learning. They embody the knowledge, skills and capabilities that are identified, mapped, taught, practised and assessed within each Business School program.

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

Program Learning Outcomes

  • Undergraduate
  • Postgraduate Coursework
Knowledge You should be able to identify and apply disciplinary knowledge to business situations in a local and global environment.
Critical thinking and problem solving You should be able to identify and research issues in business situations, analyse the issues, and propose appropriate and well-justified solutions.
Written communication You should be able to prepare written documents that are clear, concise and coherent, using appropriate style and presentation for the intended audience, purpose and context.
Oral communication You should be able to prepare and deliver oral presentations that are clear, focussed, well-structured, and delivered in a professional manner.
Teamwork You should be able to participate collaboratively and responsibly in teams, and reflect on your own teamwork, and on the team’s processes and ability to achieve outcomes.
Ethical, social and environmental responsibility
  1. You should be able to identify and assess ethical, environmental and/or sustainability considerations in business decision-making and practice.
  2. You should be able to identify social and cultural implications of business.
Workplace skills (Co-op programs only) You should be able to conduct yourself in a professional manner in the work environment, communicate effectively in diverse workplace situations and be able to apply discipline knowledge and understanding to real business problems with initiative and self-direction.
Related PLO Documents View the Undergraduate Honours PLOs (pdf)
Knowledge You should be able to identify and apply current knowledge of disciplinary or interdisciplinary theory and professional practice to business in local and global environments.
Critical thinking and problem solving You should be able to identify, research and analyse complex issues and problems in business and/or management, and propose appropriate and well-justified solutions.
Written communication You should be able to produce written documents that communicate complex disciplinary ideas and information effectively for the intended audience and purpose.
Oral communication You should be able to produce oral presentations that communicate complex disciplinary ideas and information effectively for the intended audience and purpose.
Teamwork You should be able to participate collaboratively and responsibly in teams, and reflect on your own teamwork, and on the team’s processes and ability to achieve outcomes.
Ethical, social and environmental responsibility
  1. You should be able to identify and assess ethical, environmental and/or sustainability considerations in business decision-making and practice.
  2. You should be able to identify social and cultural implications of business.
Related PLO Documents View the Master of Philosophy PLOs (pdf)
View the Doctor of Philosophy PLOs (pdf)

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.
  • Critical thinking and problem solving
  • Knowledge
  • Oral communication
  • Research capability
  • Teamwork
  • Workplace skills
  • Written communication
Entrepreneurial leaders capable of initiating and embracing innovation and change, as well as engaging and enabling others to contribute to change
  • Critical thinking and problem solving
  • Knowledge
  • Oral communication
  • Workplace skills
  • Written communication
Professionals capable of ethical, self- directed practice and independent lifelong learning
  • Ethical, social and environmental responsibility
  • Workplace skills
Global citizens who are culturally adept and capable of respecting diversity and acting in a socially just and responsible way.
  • Ethical, social and environmental responsibility
  • Oral communication
  • Written communication

The Business School strongly advises you to choose a range of courses that assist your development against these PLOs and graduate capabilities, and to keep a record of your achievements as part of your portfolio. You could use these records 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 nine to ten hours per week studying for a course except for Summer Term courses which have a minimum weekly workload of eighteen to twenty 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.

Special Consideration

You must submit all assignments and attend all examinations scheduled for your course. You can apply for special consideration when illness or other circumstances beyond your control, interfere with your performance in a specific assessment task or tasks. Special Consideration is primarily intended to provide you with an extra opportunity to demonstrate the level of performance of which you are capable.

General information on special consideration for undergraduate and postgraduate courses can be found in the Assessment Implementation Procedure and the Current Students page.

Please note the following:

  1. Applications will not be accepted by teaching staff. The lecturer-in-charge will be automatically notified when you lodge an online application for special consideration
  2. Decisions and recommendations are only made by lecturers-in-charge (or by the Faculty Panel in the case of final exam special considerations), not by tutors
  3. Applying for special consideration does not automatically mean that you will be granted a supplementary exam or other concession
  4. Special consideration requests do not allow lecturers-in-charge to award students additional marks

Business School Protocol on requests for Special Consideration

The lecturer-in-charge will need to be satisfied on each of the following before supporting a request for special consideration:

  1. Does the medical certificate contain all relevant information? For a medical certificate to be accepted, the degree of illness and its impact on the student must be stated by the medical practitioner (severe, moderate, mild). A certificate without this will not be valid. Students should also note that only medical certificates issued after physically visiting a registered medical practitioner will be accepted. Medical certificates submitted for Special Consideration should always be requested from a registered medical practitioner that you have seen at a medical practice. Certificates obtained online or via social media may be fraudulent and if relied upon could result in a breach of the UNSW Student Code.
  2. Has the student performed satisfactorily in the other assessment items? To understand what Satisfactory Performance means in this course, please refer to the 'Formal Requirements' section in Part A of your Course Outline

Special Consideration and the Final Exam in undergraduate and postgraduate courses

Applications for special consideration in relation to the final exam are considered by a Business School Faculty panel to which lecturers-in-charge provide their recommendations for each request. If the Faculty panel grants a special consideration request, this will entitle the student to sit a supplementary examination. No other form of consideration will be granted. The following procedures will apply:

  1. Supplementary exams will be scheduled centrally and will be held approximately two weeks after the formal examination period.

    Supplementary exams for Semester 1, 2018 will be held during the period 14 - 21 July, 2018. Students wishing to sit a supplementary exam will need to be available during this period.

    The date for all Business School supplementary exams for Summer Term 2017/2018 is Wednesday, 21 February, 2018. If a student lodges a special consideration for the final exam, they are stating they will be available on this date. Supplementary exams will not be held at any other time.

  2. Where a student is granted a supplementary examination as a result of a request for special consideration, the student’s original exam (if completed) will be ignored and only the mark achieved in the supplementary examination will count towards the final grade. Absence from a supplementary exam without prior notification does not entitle the student to have the original exam paper marked, and may result in a zero mark for the final exam.

The Supplementary Exam Protocol for Business School students is available at:

For special consideration for assessments other than the final exam refer to the ‘Assessment Section’ in your course outline.

Protocol for Viewing Final Exam Scripts

The UNSW Business School has set a protocol under which students may view their final exam script. Please check the protocol here.

Given individual schools within the Faculty may set up a local process for viewing final exam scripts, it is important that you check with your School whether they have any additional information on this process. Please note that this information might also be included in your course outline.

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

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 Centre
The UNSW Learning Centre provides academic skills support services, including workshops and resources, for all UNSW students. See their website for details.
Lower Ground Floor, North Wing Chancellery Building.
02 9385 2060

Educational Support Service
Educational 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. Check their website to request an appointment or to register in the Academic Success Program.
John Goodsell Building, Ground Floor.
02 9385 4734

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

Disability Support Services
UNSW Disability Support Services provides assistance to students who are trying to manage the demands of university as well as a health condition, learning disability or who have personal circumstances that are having an impact on their studies. Disability Advisers can arrange to put in place services and educational adjustments to make things more manageable so that students are able to complete their course requirements. To receive educational adjustments for disability support, students must first register with Disability Services.
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