ICM297-Liquidity Risk and Algorithmic Trading

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Modules excluded:
Module version for: 2016/7

Module Convenor: Dr Alfonso Dufour

Email: a.dufour@icmacentre.ac.uk

Summary module description:

The evolution of algorithmic trading, the proliferation of alternative trading platforms for trading the same security and the development of new products and assets with limited liquidity have contributed to raising the awareness of academics and traders on the importance of understanding and properly managing liquidity and execution risks.
The objective of this course is to give students an introduction to the concepts of market and asset liquidity, trade execution risk and an overview of the methods for managing these types of liquidity risk. This module will not discuss about funding liquidity and managing liquidity in a bank. The issues discussed in this course are important when developing trading strategies, valuing portfolios, liquidating large positions and transitioning assets to new investments.

Assessable learning outcomes:
By the end of the module, it is expected that the student will be able to
• explain the concepts of high frequency trading and algorithmic trading.
• understand the features of financial transaction data
• develop and interpret econometric models for liquidity and transaction costs
• identify the characteristic elements of alternative algorithmic trade execution strategies
• explain how to measure and manage trade execution risk and compute liquidity adjusted VaRs
• solve simple trade execution problems and develop optimal execution strategies
• understand the impact of recent regulatory changes on the market and market players

Additional outcomes:

Outline content:
Lecture 1 Introduction. Security trading industry. Algorithmic Trading. Liquidity and liquidity risk.
Lecture 2. Stylised characteristics of tick-by-tick financial data
Lecture 3. An example of algorithmic execution strategy: VWAP
Lecture 4. Liquidity suppliers. A simple model for liquidity
Lecture 5 Transaction Cost Analysis (TCA). A framework for measuring and managing trade execution costs.
Lecture 6. An econometric model for measuring the price impact of a trade
Lecture 7 Optimal execution strategies and liquidity adjusted value at risk of asset holdings
Lecture 8 Understanding, modeling and predicting execution risk
Lecture 9 MiFID and Reg-NMS. Recent regulatory trends and expected impacts on markets (competition, transparency and best execution)

Brief description of teaching and learning methods:
Core lectures supported by lab based computer seminars and classroom based tutor led discussion. Blackboard LMS is used to provide links to both additional resources and current related news and to foster discussion.

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 8
Guided independent study 172
Total hours by term 200.00
Total hours for module 200.00

Summative Assessment Methods:
Method Percentage
Written exam 80
Class test administered by School 20

Other information on summative assessment:
2 hours closed book exam: 1 compulsory question and a choice between 2 further questions

Formative assessment methods:

Penalties for late submission:
Penalties for late submission on this module are in accordance with the University policy. Please refer to page 5 of the Postgraduate Guide to Assessment for further information: http://www.reading.ac.uk/internal/exams/student/exa-guidePG.aspx

Length of examination:
2 hours closed book exam: 1 compulsory question and a choice between 2 further questions

Requirements for a pass:

Reassessment arrangements:

Additional Costs (specified where applicable):
1) Required text books:
2) Specialist equipment or materials:
3) Specialist clothing, footwear or headgear:
4) Printing and binding:
5) Computers and devices with a particular specification:
6) Travel, accommodation and subsistence:

Last updated: 21 December 2016

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