Larry Harris - Trading and exchanges: market microstructure for practitioners

Trading and Exchanges

FINANCIAL MANAGEMENT ASSOCIATION

Survey and Synthesis Series

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Trading and Exchanges: Market Microstructure for Practitioners

Larry Harris

market microstructure for Practitioners

LARRY HARRIS

Oxford New York
Auckland Bangkok Buenos Aires Cape Town Chennai Dar es Salaam Delhi Hong Kong Istanbul Karachi Kolkata Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi So Paulo Shanghai Singapore Taipei Tokyo Toronto

Copyright 2003 by Oxford University Press, Inc.

Published by Oxford University Press, Inc.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press.

Library of Congress Cataloging-in-Publication Data

Harris, Larry, 1956

Trading and exchanges : market microstructure for practitioners / Larry Harris

p. cm.(Financial Management Association survey and synthesis series)

Includes bibliographical references and index.

ISBN 0-19-514470-8
1. Markets. 2. Exchange. 3. Commerce. I. Title. II. Series.
HF5470.H37 2002
332.64dc21

2002004622

9 8 7 6 5 4 3 2 1

Printed in the United States of America
on acid-free paper

This book is dedicated
to the memory of the victims of the September 11, 2001, terrorist acts
in New York, Virginia, and Pennsylvania
and to the honor of those people
whose heroic actions on that day saved so many lives.

Many people contributed to the success of this project with their encouragement, advice, knowledge, and expertise. I would not have started this project without their interest, and I would not have completed it without their support. The book is much better for their contributions.

I received my first encouragement as a graduate student at the University of Chicago, long before I knew anything about market microstructure. Professor Arnold Zellner advised me to publish a book based on lectures I would give when I became a professor. Although it seemed unimaginable to me at the time, I never forgot his advice or his confidence in me. I look forward to the time when I will read a book written by one of my students.

Several publishers suggested that I write this book. I particularly appreciate the interest shown by editors Mike Junior, Randall Adams, Maureen Riopelle, Kenneth MacLeod, and Paul Donnelly. I have no doubt that they all would have been very helpful in the development of this book. I regret that I could not work with them all. Their encouragement, enthusiasm, and vision helped kindle and sustain my interest.

This book would not have been possible without the many insights that I learned from my academic colleagues. I especially appreciate the lessons that they taught me, and the strong expressions of interest and valuable constructive criticism that they have given me. I wish to acknowledge the following colleagues by name:

Anat Admati

Yacob Amihud

Jim Angel

Gail Belonsky

Hank Bessembinder

Bruno Biais

Bernie Black

Fischer Black

Marshall Blume

Michael Brennan

Corinne Bronfman

Mark Carhart

Henry Cheeseman

Kal Cohen

Harry DeAngelo

Linda DeAngelo

Ian Domowitz

Rob Engle

Wayne Ferson

Steve Figlewski

Margaret Forster

Doug Foster

Jennie France

Bill Freund

Mendy Fygenson

Stuart Gabriel

Ann Gillette

Tom Gilligan

Larry Glosten

Charles Goodhart

Sandy Grossman

Joe Grundfest

Eitan Gurel

Yasushi Hamao

Puneet Handa

Joel Hasbrouck

Kaj Hedvall

Pierre Hillion

Craig Holden

Kose John

Charles Jones

Avner Kalay

Eugene Kandel

Jon Karpoff

Don Keim

Laura Kodres

Pete Kyle

Josef Lakonishok

Charles Lee

Ruben Lee

Bruce Lehmann

Ken Lehn

Marc Lipson

Andy Lo

Francis Longstaff

Bob Lucas

Craig MacKinlay

Ananth Madhavan

Steve Manaster

Terry Marsh

Tom Mclnish

Haim Mendelson

Morris Mendelson

Bob Miller

Mert Miller

David Modest

Dale Morse

Belinda Mucklow

Harold Mulherin

Rob Neal

Anthony Neuberger

Maureen OHara

Daniel Orr

J. Peake

Andr Perold

Mitch Petersen

Paul Pfleiderer

Avri Ravid

Mark Ready

Jay Ritter

Kevin Rock

Ailsa Roell

Tavy Ronen

Ehud Ronn

Mark Rubinstein

Tony Saunders

Myron Scholes

Bob Schwartz

Eduardo Schwartz

Bill Schwert

Duane Seppi

Kuldeep Shastri

Alan Shapiro

Eric Sirri

Sy Smidt

Vernon Smith

Chester Spatt

Sanjay Srivastava

Jim Stancill

Laura Starks

Dave Stewart

Hans Stoll

Ren Stulz

Avanidhar Subrahmanyam

Sheridan Titman

Walt Torous

Anand Vijh

S. Viswanathan

Dan Weaver

Mark Weinstein

Ivo Welch

Ingrid Werner

Randy Westerfield

Bob Whaley

David Whitcomb

Joe Williams

Bob Wood

This book would not have been creditable were it not for the many practitioners and regulators who have shared their time with me to explain what they do. I particularly appreciate the generosity and encouragement that the following individuals have extended to me:

Stanley Abel

Howard Baker

Frank Baxter

Brandon Becker

Gil Beebower

Jeff Benton

Dale Berman

Charles Black

David Booth

Harold Bradley

Kurt Bradshaw

Pearce Bunting

Richard Cangelosi

Jim Cochrane

David Colker

Cromwell Coulson

Larry Cuneo

David Cushing

Harry Davidow

Pina DeSantis

Mike Edleson

Jim Farrell

Tom Fay

Gene Finn

Ed Fleischman

Russ Fogler

Gifford Fong

Stuart Fraser

Dean Furbush

Jim Gallagher

Gary Gastineau

Brian Geary