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: 2020/1

Module Convenor: Dr Alfonso Dufour

Email: a.dufour@icmacentre.ac.uk

Type of module:

Summary module description:

This module is delivered at University of Reading

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 exe cution 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:

The main topics are:

• 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 discussions.

Contact hours:
  Autumn Spring Summer
Lectures 20
Seminars 10
Guided independent study:      
    Wider reading (independent) 60
    Wider reading (directed) 20
    Exam revision/preparation 30
    Preparation for seminars 10
    Revision and preparation 30
    Reflection 20
Total hours by term 0 0
Total hours for module 200

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 (last week before Easter break)

Formative assessment methods:

Sample multiple-choice questions and seminar discussion.

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:

By written examination only, to be taken in August/September, as part of the overall examination arrangements for the MSc programme

Additional Costs (specified where applicable):

Last updated: 4 April 2020


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