Market Microstructure in Practice: Why and how
to trade optimally in a fragmented market
Charles-Albert Lehalle
Senior Research Advisor, Capital Fund Management, Paris
April 2015, Printed the April 13, 2015
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Purpose of these Lectures
It is not the presentation of a recent research, but a mix of my former experience as the Global Head of Quant
Research of the Equity Brokerage and Derivative Dept. of a large Investment Bank (Crédit Agricole CIB), with a
specific focus on trading since I started at CACIB as Head of Quant Research of its brokerage arm (CA
Cheuvreux), my current one as Senior Research Advisor in an hedge fund (CFM), and the questions I have or
had to answer to the French regulator (AMF), the European one (ESMA), and other entities I have positions into.
Nevertheless I only talk on my behalf, all that is written or said is only my opinion and not theirs.
My three lectures are split across:
I The Emergence of Continuous Trading . In this part I will deal with microstructural topics in the classical
sense, but with a specific angle: the one of the role of the financial system. We will talk about
intermediation, fragmentation, regulation, market making, etc.
I What to model and what for? is the question I will address during the second part. Of course it is linked
with the user of the model. The role of market participants, their needs in modelling (observed market
dynamics and/or the nature of their interactions with markets) will be discussed. From an empirical or a
theoretical viewpoint.
I Optimal trading? In what sense? During the last part I will simply focus on the principal — agent
problem in optimal trading (we will have a lot of talks about optimal trading techniques this week), and open
the topics to big data with the issue of monitoring hundreds of trading algorithms in realtime.
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More Details About the Talks
The Emergence of Continuous Trading .
I The role of financial markets in the financial system
I Recent evolutions of microstructure
I Fragmentation(s)
What to model and what for?
I Market participants
I Observing short term dynamics: simple descriptions
I Short term dynamics: towards orderbook modelling
I Modelling interactions with markets: Market Impact
Optimal trading? In what sense?
I Optimal trading in the Principal-Agent problem
I Monitoring trading algorithms: a machine learning viewpoint
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Main Supporting Papers and Books I
Optimal Trading.
1. Bruno Bouchard, Ngoc-Minh Dang, and Charles-Albert Lehalle. Optimal control of trading algorithms: a
general impulse control approach. SIAM J. Financial Mathematics, 2(1):404–438, 2011.
2. O. Guéant, Charles-Albert Lehalle, and J. Fernandez-Tapia. Optimal Portfolio Liquidation with Limit Orders.
SIAM Journal on Financial Mathematics, 13(1):740–764, 2012.
3. Olivier Guéant and Charles-Albert Lehalle. General intensity shapes in optimal liquidation. Mathematical
Finance, page n/a, October 2013.
4. Olivier Guéant, Charles-Albert Lehalle, and Joaquin Fernandez-Tapia. Dealing with the inventory risk: a
solution to the market making problem. Mathematics and Financial Economics, 4(7):477–507, September
2013.
5. Mauricio Labadie and Charles-Albert Lehalle. Optimal starting times, stopping times and risk measures for
algorithmic trading. The Journal of Investment Strategies, 3(2), March 2014.
6. Charles-Albert Lehalle. Market Microstructure knowledge needed to control an intra-day trading process. In
Jean-Pierre Fouque and Joseph Langsam, editors, Handbook on Systemic Risk. Cambridge University
Press, May 2013.
Market Microstructure.
7. Lehalle, C.-A., Laruelle, S., Burgot, R., Pelin, S., and Lasnier, M. (2013). Market Microstructure in Practice.
World Scientific publishing.
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Main Supporting Papers and Books II
8. Frédéric Abergel, Jean-Philippe Bouchaud, Thierry Foucault, Charles-Albert Lehalle, and Mathieu
Rosenbaum, editors. Market Microstructure Confronting Many Viewpoints. Wiley, 2012.
9. Emmanuel Bacry, Adrian Iuga, Matthieu Lasnier, and Charles-Albert Lehalle. Market Impacts and the Life
Cycle of Investors Orders. Social Science Research Network Working Paper Series, December 2014.
10. Paul Besson and Charles-Albert Lehalle. The Deal/Book Split Analysis: A New Method to Disentangle the
Contribution to Market and Limit Orders in Any Price Change. Social Science Research Network Working
Paper Series, January 2014.
11. Weibing Huang, Charles-Albert Lehalle, and Mathieu Rosenbaum. Simulating and analyzing order book
data: The queue-reactive model, December 2013.
12. Aimé Lachapelle, Jean-Michel Lasry, Charles-Albert Lehalle, and Pierre-Louis Lions. Efficiency of the Price
Formation Process in Presence of High Frequency Participants: a Mean Field Game analysis, May 2013.
13. Charles-Albert Lehalle, Matthieu Lasnier, Paul Besson, Hamza Harti, Weibing Huang, Nicolas Joseph, and
Lionel Massoulard. What does the saw-tooth pattern on US markets on 19 July 2012 tell us about the price
formation process. Technical report, Crédit Agricole Cheuvreux Quant Note, August 2012.
14. Charles-Albert Lehalle, Olivier Guéant, and Julien Razafinimanana. High Frequency Simulations of an
Order Book: a Two-Scales Approach. In F. Abergel, B. K. Chakrabarti, A. Chakraborti, and M. Mitra, editors,
Econophysics of Order-Driven Markets, New Economic Windows. Springer, 2010.
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Main Supporting Papers and Books III
Stochastic Algorithms for trading.
15. Gilles Pagès, Sophie Laruelle, and Charles-Albert Lehalle. Optimal split of orders across liquidity pools: a
stochastic algorithm approach. SIAM Journal on Financial Mathematics, 2:1042–1076, 2011.
16. Sophie Laruelle, Charles-Albert Lehalle, and Gilles Pagès. Optimal posting price of limit orders: learning by
trading. Mathematics and Financial Economics, 7(3):359–403, June 2013.
17. Robert Azencott, Arjun Beri, Yutheeka Gadhyan, Nicolas Joseph, Charles-Albert Lehalle, and Matthew
Rowley. Realtime market microstructure analysis: online Transaction Cost Analysis. Quantitative Finance,
pages 0–19, March 2014.
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And more...
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