Notes for /Trades, Quotes, and Prices/

git clone git://
commit 2550ab7d555499b37f15ea3092c532f1e0c5e626
parent 4c09f425f9413dfaefed25d462582c740595a3f2
Author: Shimmy Xu <>
Date:   Sat, 20 Apr 2019 19:15:03 -0400

Add notes for Chapter 1

Diffstat: | 31+++++++++++++++++++++++++++++++
1 file changed, 31 insertions(+), 0 deletions(-)
diff --git a/ b/
@@ -0,0 +1,31 @@
+#+Title: Trades, Quotes and Prices: Financial Markets Under the Microscope
+#+Subtitle: Notes
+#+Author: Shimmy Xu
+#+LaTeX_CLASS: article
+#+LaTeX_HEADER: \usepackage{amsmath,amssymb,amsthm,placeins,esint,bm}
+#+LaTeX_HEADER: \usepackage[margin=1in]{geometry}
+#+INCLUDE: "~/.emacs.d/static/math_macros.sty" src latex-macros
+#+Options: toc:nil num:t
+* Chapter 1
+Walrasian auction: traders express commitment to trade at certain prices (liquidity provision) to auctioneer and auctioneer periodically clears market at intersection of supply and demand curve.
+Market-making: market-maker (designated and are privileged) provides public quotes themselves and clears at a price that minimizes unsatisfied orders. market-maker's quotes helps coordination between sellers and buyers, a mechanism that Walrasian auction lacks.
+Continuous-time double auction: use a public limit order book (LOB) and a designated market-makers are no longer necessary.
+Fundamental analysis attempts to decide whether an asset is over-priced or under-priced. Quantitative analysis (or technical analysis) attempts to predict price movements by identifying price patterns.
+Empirically, dispersion of future price changes is much larger than the mean predicted price change, which means informed trades are either very rare and very successful or more common but with low degree of individual success due to weak information content.
+Price changes are close to being martingales. This implies that the real information contained in the signals used by traders or investors is extremely weak. The overall nagging feeling is that speculative traders trade too much, probably as a result of overestimating the predictive power of their signals and underestimating the costs of doing.
+In LOB modern markets, a simple separation of market participants could be: speculators (or liquidity takers), who typically trade at medium-to-low frequencies, and market-makers (general concept, non-privileged), who typically trade at high frequencies.
+Speculators faces risk from inaccurate predictions and market-maker faces adverse selection risk. market-maker adjust quotes to mitigate adverse selection costs and thus causing trades to have price impact. market-maker then need a spread twice as wide as price impact to profit.
+Distribution of price changes after a trade is very broad, with a heavy tail in the direction of the trade. This means while most trades are noisy, a small percentage have high information content. Overall this causes market-maker's P&L to be negatively skewed. Market-making is akin to selling insurance: although profitable on average, this strategy may generate enormous losses in the presence of informed traders.
+A typical US large cap stock's daily traded volume would be around \(0.5\%\) of total market capitalization. A small cap would be even lower at around \(0.1\%\). At any given time, the quantity available on the order book would be \(10^{-4}\) of market cap, which means even "highly liquid" markets might not be very liquid at all. This is because market-makers are reluctant to commit to large quantities due to adverse selection. As a result, markets operate in a regime of small revealed liquidity but large latent liquidity and large trades must be fragmented.
+Prices cannot be in equilibrium: since trades are fragmented, at any instant, the traded volume is much smaller than the latent supply and demand; at larger time scales, information start to display it's long term effects, causing price to change.