Financial Trading and Investing

3rd Edition - July 9, 2022

Author: John L. Teall

Paperback ISBN:

9 7 8 - 0 - 3 2 3 - 9 0 9 5 5 - 6

eBook ISBN:

9 7 8 - 0 - 3 2 3 - 9 8 4 4 5 - 4

Financial Trading and Investing, Third Edition provides a useful introduction to trading and market microstructure for advanced undergraduate as well as master’s students. Without… Read more

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Financial Trading and Investing, Third Edition provides a useful introduction to trading and market microstructure for advanced undergraduate as well as master’s students. Without demanding a background in econometrics, the book explores alternative markets and highlights recent regulatory developments, implementations, institutions and debates. The text offers explanations of controversial trading tactics (and blunders) such as high-frequency trading, dark liquidity pools, fat fingers, insider trading and flash orders, emphasizing links between the history of financial regulation and events in financial markets. It includes coverage of valuation and hedging techniques, particularly with respect to fixed income and derivative securities. The text adds a chapter on financial utilities and institutions that provide support services to traders and updates regulatory matters.

Combining theory and application, this book provides a practical beginner's introduction to today's investment tools and markets with a special emphasis on trading.

Cover image
Title page
Table of Contents
Copyright
Dedication
Preface
Acknowledgments
Chapter 1. Introduction to Securities Trading and Markets
Abstract
1.1 Trades, Traders, Securities, and Markets
1.2 Securities Trading
1.3 Bargaining
1.4 Auctions
1.5 Introduction to Market Microstructure
1.6 Orders, Liquidity and Depth
1.7 Day Trading
1.8 Trading and the Broader Economy
References
1.9 Exercises
Chapter 2. Securities Markets
Abstract
2.1 Exchanges and Floor Markets
2.2 The Way It Was
2.3 Over-the-Counter Markets and Alternative Trading Systems
2.4 The Decline of Brick and Mortar
2.5 Crossing Networks and Upstairs Markets
2.6 Fixed-Income Securities and Money Markets
2.7 Markets around the World
2.8 Currency Exchange and Markets
2.9 Cryptocurrency and Bitcoin Trading
2.10 Commodities and Futures
2.11 Swaps and Swap Execution Facilities
Additional Reading
References
2.12 Exercises
Chapter 3. Financial Market Utilities and Securities Trading Support
Abstract
3.1 Securities Trading Infrastructure
3.2 Price and Quotation Systems
3.3 Brokerage Operations
3.4 Clearing and Settlement
3.5 Other Financial Market Utilities and Functions
3.6 Systemically Important Financial Market Utilities
Additional Reading
References
3.7 Exercises
Chapter 4. Institutional Trading
Abstract
4.1 Institutions and Market Impact
4.2 Registered Investment Companies
4.3 Unregistered Investment Companies
4.4 Best Execution, Execution Costs, and Price Improvement
4.5 Algorithmic Trading
4.6 Dark Pools
4.7 Stealth and Sunshine Trading
4.8 High-Frequency Trading
4.9 Flash Trading and Sponsored Access
Additional Reading
References
4.10 Exercises
Chapter 5. Regulation of Trading and Securities Markets
Abstract
5.1 Regulatory Approaches and the Regulatory Balance
5.2 Pre-1930s Securities Regulation: The Background
5.3 U.S. Securities Market Legislation: The Foundation
5.4 Crises and Updating the Regulatory System
5.5 Deregulation, Corporate Scandals, and the Financial Crisis of 2008
5.6 Dodd–Frank
5.7 Government Oversight of Self-Regulation
5.8 Impact of Regulatory Activity
5.9 Regulation: The International Arena
5.10 Privatization of Regulation and Exchange Rules
Additional Reading
References
5.11 Exercises
Chapter 6. Adverse Selection, Trading, and Liquidity
Abstract
6.1 Market Microstructure, Liquidity, and Spreads
6.2 Information and Trading
6.3 Noise Traders
6.4 Adverse Selection in Dealer Markets
6.5 Adverse Selection, Dealer Inventories, and the Spread
6.6 Risk, Risk Aversion, and Dealer Spreads
6.7 Exercises
Appendix 6.A
6.A.1 The Kyle Adverse Selection Model
The Informed Trader’s Problem: Profit Maximization
Dealer Price Setting
Informed Trader Demand and Dealer Price Adjustment
References
Chapter 7. Random Walks, Risk, and Arbitrage
Abstract
7.1 Market Efficiency and Random Walks
7.2 Risk
7.3 Arbitrage
7.4 Limits to Arbitrage
7.5 Exercises
Appendix 7.A
7.A.1 Return and Risk Spreadsheet Applications
7.A.2 A Primer on Black-Scholes Option Pricing
7.A.3 Estimating Implied Black-Scholes Variances
References
Chapter 8. Arbitrage and Hedging With Fixed Income Instruments and Currencies
Abstract
8.1 Arbitrage With Riskless Bonds
8.2 Fixed Income Hedging
8.3 Fixed Income Portfolio Immunization
8.4 Term Structure, Interest Rate Contracts, and Hedging
8.5 Arbitrage With Currencies
8.6 Arbitrage and Hedging With Currency Forward Contracts
8.7 Hedging Exchange Exposure
Additional Reading
References
8.8 Exercises
Chapter 9. Arbitrage and Hedging With Options
Abstract
9.1 Derivative Securities Markets and Hedging
9.2 Put–Call Parity
9.3 Options and Hedging in a Binomial Environment
9.4 The Greeks and Hedging in a Black-Scholes Environment
9.5 Exchange Options
9.6 Hedging Exchange Exposure With Currency Options
9.7 Exercises
Appendix 9.A
9.A.1 The Binomial Model: Additional Considerations
9.A.2 Deriving the Black-Scholes Model
References
Chapter 10. Evaluating Trading Strategies and Performance
Abstract
10.1 Evaluating Investment Portfolio Performance
10.2 Market Timing Versus Selection
10.3 Trade Evaluation and Volume-Weighted Average Price
10.4 Implementation Shortfall
10.5 Value at Risk
Additional Reading
References
10.6 Exercises
Chapter 11. The Mind of the Investor
Abstract
11.1 Rational Investor Paradigms
11.2 Prospect Theory
11.3 Behavioral Finance
11.4 Body and Mind of the Trader
11.5 Neurofinance: Getting Into the Investor’s Head
11.6 The Consensus Opinion: Stupid Investors, Smart Markets?
Additional Reading
References
11.7 Exercises
Chapter 12. Market Efficiency
Abstract
12.1 Introduction to Market Efficiency
12.2 Weak Form Efficiency and Technical Analysis
12.3 Testing Momentum and Mean Reversion Strategies
12.4 Semistrong Form Efficiency
12.5 The Event Study Methodology
12.6 Strong Form Efficiency and Insider Trading
12.7 Anomalous Efficiency and Prediction Markets
12.8 Epilogue
Additional Reading
References
12.9 Exercises
Chapter 13. Trading Gone Awry
Abstract
13.1 The Dark Side of Finance
13.2 Illegal Insider Trading
13.3 Front Running and Late Trading
13.4 Bluffing and Market Manipulation
13.5 Payment for Order Flow
13.6 Fat Fingers, Hot Potatoes, and Technical Glitches
13.7 Rogue Trading and Rogue Traders
13.8 Hiding Trading Losses with Ponzi Schemes
Additional Reading
References
13.9 Exercises
Mathematics Appendix
A.1 A Brief Overview of Elementary Statistics
A.2 Essentials of Matrices and Matrix Arithmetic
A.3 Derivatives of Polynomials
A.4 Reference Tables
End-of-Chapter Exercise Solutions
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Glossary
Index