Market Liquidity —— Theory, Evidence, and Policy

I haven't finished with the book yet, but on the first pass through it I think the writing is clear and easy to follow. The authors are careful to distinguish between different theoretical measures and models (e.g., models of the bid-ask spread) and make the effort to discuss when and how they can (and can't) be differentiated with real data. I also appreciated the wealth of academic citations and further reading recommendations. On the whole, I think Market Liquidity: Theory, Evidence, and Policy is a great introduction to the topic and I would recommend it to anyone interested in learning about or teaching liquidity or microstructure.

Le sujet est intéressant mais les auteurs, qui ne parlent que très du contexte institutionnel, présentent des petits modèles économiques sans grand intérêt à mon avis. Mieux vaut aller regader par exemple les polys de Joel Hasbrouck.

Just take a look of the table of contents then you understand it is cutting edge and very valuable. If you find something missing in book such as O'Hara (1995), Brunnermeier (2001), Hasbrouck (2007), de Long and Rindi (2009), Vives (2010), Veldkamp (2011) or you want to advance your understanding of financial market, then this is the book for you. We all knew the research contribution made by the authors, now we should thank them for writing such a wonderful book.

This is a credible overview of the issues of market microstructure from an academic perspective. The focus is on equity markets, clearly the authors' forte, but there are also nice bits on fixed income and foreign exchange markets. The book covers a good deal of empirical research, basic quantitative models, as well as regulatory matters. All of it is interspersed with historical remarks and cleverly chosen anecdotes. A pleasure to read.

Highly theoretical, not that much for practitioners who want to understand the markets they place orders in to.

Liquidity can mean a bunch of things. In Economics it’s to do with the money supply and it’s been studied by the likes of Fisher, Keynes and Hicks, all the way to Milton Friedman. In corporate finance it’s to do with the amount of money a firm keeps on hand; given the role (the lack of) liquidity played in the crash of 2008, when firms sold anything that wasn’t nailed to the floor to get their hands on cash, it’s been studied quite extensively too, including by giants like Jean Tirole. This pioneering book is about a third type of liquidity: the impact of a transaction on the price of an asset. In particular, the authors concern themselves with liquidity in the equities market. I’ve spent a quarter century trading bonds, rather than stocks. Bonds trade on voice, mainly, so it’s quasi-impossible for academics to study bond liquidity. I’d therefore never bothered to read the literature. That was my loss! So in my previous job I designed and implemented a market-making algorithm for government bonds based on the “skewed inventory” principle that people use in FX. My colleague Bernard and I had advertised our ability to do this to our employers, but in reality we did not crack the problem until we’d spent a good three months on it, often despairing we’d come up with something reasonable. You can imagine my surprise when I saw the exact answer we came up with on page 150 of this book, which has been in print since 2013. I guess fixed income is a total backwater when it comes to formalizing how liquidity works. That’s my excuse, at any rate :-) The book is split into three parts: The first part is a survey of methods to calculate the right bid-ask for a trade. It starts simple and naïve and slowly builds in all the necessary components: • a charge to compensate for some of the flow being, ahem, “informed” • a charge (or rebate) for the fact that the trade will alter your inventory • finally, drumroll please, your “rent” The converse is covered too: How to go from observing the ticker tape to estimating what the market is charging for all of the above. I loved this part of the book, it made it worth the purchase. The second part of the book covers “Market Design” and should be required reading for all regulators, commentators, for Michael Lewis wannabes etc. You find out that the dealers win if tick size is large, what volatility does to bid-ask (clue: it does not make it easy to quote), it explains what the “Flash Boys” do (with the best explanation ever of Regulation NMS) and generally speaking it’s “all you ever wanted to know about rent extraction but were afraid to ask.” The third part of the book explores another very important aspect of liquidity: the fact that lack of liquidity can stand in the way of asset prices reaching their equilibrium. I’m close to Andrei Shleifer, but I’d never read the paper where he explains mathematically why “the market can stay irrational for longer than you can stay solvent.” The authors do a tremendous job of laying it all out, taking you through the logical steps of how arbitrageurs can be forced to liquidate good positions before the market does it for them. Bravo! They close the book by taking you through the latest theories regarding the impact of liquidity on corporate governance. So what we have here is a potential five-star book, but it is marred by some schoolboy errors that will hopefully disappear from future editions. I’d forgive the authors if those mistakes had not cost me so much time to discover. I list them here to save you from scratching your head: pp. 87-93 the authors confuse themselves for no reason. The spread in equation 3.12 can be derived trivially, but it needs to be imposed on the post-information mid, the one after we know if the customer wanted to buy or sell. So at the bottom of p. 93 where the authors say ASKt = MUt+ and BIDt = MUt- that’s plain wrong. You need to add the half-spread to MUt+ to get to ASKt and you need to subtract the half-spread from MUt- to get to BIDt. p. 109 it’s wrong to say that Yt = Dt, it’s –Dt. But two wrongs make a right (think about it) and formula 3.45 a bit further down is correct. p. 139 contrary to the claim the formulae do not describe the volatility in response to an uninformed trade. They describe the volatility in response to mixed flow of informed and uninformed trades. Finally (and this is not really a mistake) on page 167 the author gets all the math right, but fails to draw a conclusion that could be super-helpful to arguments made in the second part of the book: the dealer rent may well wash out of the correlation, but it sure hurts the client’s back pocket! Regardless of these mistakes, I thoroughly enjoyed this book and recommend it to anybody who wants to understand market liquidity. Don’t be scared, the math is totally within the grasp of a good high school student!

Great book

very good book for masters level and to some extent PhD level studies. I found it to be very useful for my PhD research.

This book is very much useful for both the beginners and also to those who are advanced learners of Market Microstructure. This book can be easily adopted for course on Market Microstructure along with trading and exchanges. I used it for a course on Market Microstructure and students highly appreciated the contents. The authors provide lucid yet depth the liquidity aspects, both theoretical and empirical estimations. For those who are pursuing research in the area of Market Microstructure, this book will be a nice addition to their resources. I highly recommend it.

I haven't finished with the book yet, but on the first pass through it I think the writing is clear and easy to follow. The authors are careful to distinguish between different theoretical measures and models (e.g., models of the bid-ask spread) and make the effort to discuss when and how they can (and can't) be differentiated with real data. I also appreciated the wealth of academic citations and further reading recommendations. On the whole, I think Market Liquidity: Theory, Evidence, and Policy is a great introduction to the topic and I would recommend it to anyone interested in learning about or teaching liquidity or microstructure.

Liquidity can mean a bunch of things. In Economics it’s to do with the money supply and it’s been studied by the likes of Fisher, Keynes and Hicks, all the way to Milton Friedman. In corporate finance it’s to do with the amount of money a firm keeps on hand; given the role (the lack of) liquidity played in the crash of 2008, when firms sold anything that wasn’t nailed to the floor to get their hands on cash, it’s been studied quite extensively too, including by giants like Jean Tirole.This pioneering book is about a third type of liquidity: the impact of a transaction on the price of an asset. In particular, the authors concern themselves with liquidity in the equities market.I’ve spent a quarter century trading bonds, rather than stocks. Bonds trade on voice, mainly, so it’s quasi-impossible for academics to study bond liquidity. I’d therefore never bothered to read the literature.That was my loss!So in my previous job I designed and implemented a market-making algorithm for government bonds based on the “skewed inventory” principle that people use in FX. My colleague Bernard and I had advertised our ability to do this to our employers, but in reality we did not crack the problem until we’d spent a good three months on it, often despairing we’d come up with something reasonable.You can imagine my surprise when I saw the exact answer we came up with on page 150 of this book, which has been in print since 2013. I guess fixed income is a total backwater when it comes to formalizing how liquidity works. That’s my excuse, at any rate :-)The book is split into three parts:The first part is a survey of methods to calculate the right bid-ask for a trade. It starts simple and naïve and slowly builds in all the necessary components:• a charge to compensate for some of the flow being, ahem, “informed”• a charge (or rebate) for the fact that the trade will alter your inventory• finally, drumroll please, your “rent”The converse is covered too: How to go from observing the ticker tape to estimating what the market is charging for all of the above. I loved this part of the book, it made it worth the purchase.The second part of the book covers “Market Design” and should be required reading for all regulators, commentators, for Michael Lewis wannabes etc. You find out that the dealers win if tick size is large, what volatility does to bid-ask (clue: it does not make it easy to quote), it explains what the “Flash Boys” do (with the best explanation ever of Regulation NMS) and generally speaking it’s “all you ever wanted to know about rent extraction but were afraid to ask.”The third part of the book explores another very important aspect of liquidity: the fact that lack of liquidity can stand in the way of asset prices reaching their equilibrium. I’m close to Andrei Shleifer, but I’d never read the paper where he explains mathematically why “the market can stay irrational for longer than you can stay solvent.” The authors do a tremendous job of laying it all out, taking you through the logical steps of how arbitrageurs can be forced to liquidate good positions before the market does it for them. Bravo! They close the book by taking you through the latest theories regarding the impact of liquidity on corporate governance.So what we have here is a potential five-star book, but it is marred by some schoolboy errors that will hopefully disappear from future editions. I’d forgive the authors if those mistakes had not cost me so much time to discover. I list them here to save you from scratching your head:pp. 87-93 the authors confuse themselves for no reason. The spread in equation 3.12 can be derived trivially, but it needs to be imposed on the post-information mid, the one after we know if the customer wanted to buy or sell. So at the bottom of p. 93 where the authors say ASKt = MUt+ and BIDt = MUt- that’s plain wrong. You need to add the half-spread to MUt+ to get to ASKt and you need to subtract the half-spread from MUt- to get to BIDt.p. 109 it’s wrong to say that Yt = Dt, it’s –Dt. But two wrongs make a right (think about it) and formula 3.45 a bit further down is correct.p. 139 contrary to the claim the formulae do not describe the volatility in response to an uninformed trade. They describe the volatility in response to mixed flow of informed and uninformed trades.Finally (and this is not really a mistake) on page 167 the author gets all the math right, but fails to draw a conclusion that could be super-helpful to arguments made in the second part of the book: the dealer rent may well wash out of the correlation, but it sure hurts the client’s back pocket!Regardless of these mistakes, I thoroughly enjoyed this book and recommend it to anybody who wants to understand market liquidity. Don’t be scared, the math is totally within the grasp of a good high school student!

Le sujet est intéressant mais les auteurs, qui ne parlent que très du contexte institutionnel, présentent des petits modèles économiques sans grand intérêt à mon avis. Mieux vaut aller regader par exemple les polys de Joel Hasbrouck.