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:
Current from: 2018/9

Module Convenor: Dr Alfonso Dufour

Email: a.dufour@icmacentre.ac.uk

Type of module:

Summary module description:

This module introduces the concepts of liquidity and trade execution risks. It illustrates the theory and models which are implemented with trade execution algorithms. A sample of tick-by-tick equity data is used in the seminars to learn how to apply all models discussed in the lectures.


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

•  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:

The module will offer the opportunity to develop tick-by-tick data management skills, learn how to use Pivot Tables and Solver in excel and acquire basic coding skills with Eviews.

Outline content:

Introduction: security trading industry, algorithmic trading, liquidity, liquidity risk and liquidity suppliers.

Stylised features of tick-by-tick financial data

An example of algorithmic execution strategy: volume weighted average price (VWAP) algorithms

Transaction Cost Analysis (TCA). A framework for measuring and managing trade execution costs.

Modelling and predicting the price impact of a trade

Optimal execution strategies and liquidity adjusted value at risk of asset holdings

Understanding, modelling and predicting execution risk

MiFID I and II, Reg-NMS and Dodd-Frank’s act. Recent regulatory trends and their impact 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.

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 7
Guided independent study 173
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

Summative assessment- Examinations:

A 2-hour written exam: 80% of the total assessment mark (short questions and essays)

Summative assessment- Coursework and in-class tests:

A 1-hour multiple choice test: 20% of the total assessment mark

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

Assessment requirements for a pass:

50% weighted average mark

Reassessment arrangements:

Exam only. Re-sit examination to be taken in August/September.

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: 1 August 2018


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