The Equity Trader Course


Praise for The Equity Trader Course +CD

"Without trading, investing is an academic exercise. This book and its computer simulation bridge the gap and should be required reading for traders, old and new, and anyone who wants to understand why America's equity markets are the richest and deepest in the world. Part primer and part advanced discussion of modern trading techniques and technology, this book should be in every trading room. Authors Schwartz, Francioni, and Weber—along with a slew of important contributors—have created the definitive course on equity trading. Ignore this book at your investing peril!"
—Theodore R. Aronson, CFA, Aronson+Johnson+Ortiz, and former chair of the board of governors, CFA Institute

"Back in the early days of Island, we all read Bob Schwartz's articles on limit order trading. Now, with The Equity Trader Course, tomorrow's traders can benefit from this comprehensive overview of stock trading."
—Matt Andresen, President, Citadel Execution Services, and former CEO, Island ECN

"In the world of trading, letting others make their move first pays. This is but one bit of salient advice found in this book. The authors reinforce the importance of liquidity and the placement of limit and market orders. Their appreciation for technical analysis and the need for algorithmic trading guide the reader toward the discipline of risk management and the goal of best execution."
—Ralph J. Acampora, CMT, Managing Director, Knight Research, Knight Equity Markets, L.P.

"An excellent update on the theory and practice of equity trading. The authors present the state of the art of the business. This is a highly useful reference for today's professionals."
—Dr. Josef Ackerman, Chairman, Group Executive Committee, Deutsche Bank AG

"The world's equity markets are large, intricate, and rapidly evolving. Yet, drill down below the surface and there is structure and logic. This book, with clear and insightful text, superbly illuminates the picture for both the novice and the seasoned trader."
—Peter Forstmoser, Chairman, Swiss Re, and Professor, University of Zurich

ROBERT A. SCHWARTZ is Marvin M. Speiser Pro-fessor of Finance and University Distinguished Professor in the Zicklin School of Business, Baruch College, CUNY. Before joining the Baruch faculty in 1997, he was Professor of Finance and Economics and Yamaichi Faculty Fellow at New York University's Leonard N. Stern School of Business, where he had been a member of the faculty since 1965. Professor Schwartz received his PhD in economics from Columbia University. He has published over fifty journal articles and fifteen books, including Equity Markets in Action (Wiley), which he coauthored with Reto Francioni. He has served as a consultant to various market centers including the New York Stock Exchange, the American Stock Exchange, NASDAQ, and Deutsche Börse, and has been an associate editor for several finance journals. In 1995, Professor Schwartz was named the first chairman of NASDAQ's Economic Advisory Board, where he served until the spring of 1999.

RETO FRANCIONI has been the CEO of the Executive Board of Deutsche Börse AG, since November 2005, and was president and chairman of the board of SWX Group. In 1993, Francioni joined Deutsche Börse AG, where he was responsible for its entire cash market and later became its deputy chief executive officer. Earlier in his career, he was a director of the corporate finance division at Hoffmann-LaRoche AG, Switzerland. Francioni has a law degree and PhD in law from Zurich University and is Professor of Economics and Finance at the Zicklin School of Business, Baruch College, CUNY.

BRUCE W. WEBER is Associate Professor of InformationManagement at the London Business School, where he teaches information management and trading and financial market structure in MBA, master's, and executiveprograms. He has a PhD in decision sciences from the Wharton School of the University of Pennsylvania. His research on strategic uses of IT and the computerization of financial services has been published in a number of academic journals, and he has consulted for a host of financial services organizations. Prior to joining the London Business School in 2003, he was on the faculties of the Stern School of Business–New York University and Baruch College, CUNY.

Foreword Alfred R. Berkeley III, CEO, Pipeline Trading Systems LLC.


CHAPTER 1 Getting a Grip on Trading.

Order Arrival.

The Bid-Ask Spread.

The Liquidity Dimension.

Overview of TraderEx.

Getting Started with TraderEx.

From the Contributors 38

Using Trading Simulations on an Academic Trading Floor: Where the Rubber Meets the Road (Richard D. Holowczak).

Reflections of a Finance Professor (Michael S. Pagano).

On-the-Job Training at Mako (David Segel).

CHAPTER 2 All About Liquidity.

From Information to Prices.

Defining Liquidity.

Liquidity and Transaction Costs.

Intraday Price Volatility, Price Discovery, and Quantity Discovery.

The Origins of Liquidity.

Illiquidity’s Footprints in the Transaction Records.


From the Contributors.

Satisfying Institutional Traders’ Quest for Liquidity (Peter Jenkins).

Giving Customers Greater Choice in Trade Execution: The NYSE Hybrid Market (John A. Thain).

Market Reaction to New Information (Claudio Werder and René Weber).

CHAPTER 3 How to Use Limit and Market Orders.

The Order Book and the Market.

Order Types.

A Look at the Market.

A Reservation Price.

Cost of Placing a Limit Order.

Compensation for Placing a Limit Order.

Should You Submit a Limit Order or a Market Order?

How Should You Price Your Limit Orders?

The Bid-Ask Spread.

Handling a Large Order.

An Option Trader’s View of Limit Orders.

The Big Picture.

From the Contributors.

The Emergence and Growth of an Electronic Order-Driven Market (Gerald Putnam).

The Use of Limit and Market Orders (Rainer Riess and Uwe Schweickert ).

Order-Driven Markets: The Route to Best Execution (Jean-François Théodore).

Exercises 158

CHAPTER 4 Choosing between Continuous Trading and a Periodic Call Auction.

How is a Call Auction Used?

Call Auctions and Market Structure.


Order Handling Differences.

NASDAQ’s Crosses.

How to Submit an Order to a Call Auction.

A Reality Check.

Option Value of Limit Orders in a Call Auction.

Time to Call the Market.

From the Contributors.

A Call Is Not a Call Is Not a Call (Alfred R. Berkeley III).

The NASDAQ Crosses: A View from the Inside (Frank M. Hatheway).

Call Market Trading—It’s About Time (James Ross).


Appendix to Chapter 4: Further Details on Clearing Price Determination.

CHAPTER 5 Market Intermediaries: Nuts ’n’ Bolts and Challenges.

Emergence of the Modern Markets.

Intermediation on the NYSE.

Intermediation at NASDAQ.

Overview of Market Maker Operations.

Order Handling and Transparency in a Dealer Market.

Competition and Preferencing.

Price Improvement.

The Future of Intermediaries in Hybrid Markets.

From the Contributors.

NASDAQ Market Makers in the NASDAQ Stock Market (Robert Greifeld).

Electronic Intermediaries for Block Trading (Martin Reck ).

The Importance of Market Making (Frank L. Romanelli).

CHAPTER 6 The Road to Technical Analysis and Algorithmic Trading.

Dynamic Price Discovery.

Quantity Discovery.

Technical Analysis.

Algorithmic Trading.

From the Contributors.

Algo History at TIAA-CREF (Paul L. Davis).

The Complexity of Market Information (John H. Porter).

The Mood of a Market (David Segel ).

Appendix to Chapter 6: Order Handling and Market Timing on a Trading Floor.

CHAPTER 7 Performance Measurement.

Three Simple Performance Measures.

Transaction Cost Analysis.

Risk Management.

Best Execution.

Measuring the Performance of a Market Center.

Best Execution and Performance Reconsidered.

From the Contributors.

The Quest for Trading’s Holy Grail—Alpha! (Marcus Hooper).

How Intelligent Traders Enhance Their Skills with a TCA Report (Wayne H. Wagner and Melissa Spurlock).

Appendix to Chapter 7: Explaining Risk Aversion.

APPENDIX Prices and Returns.

The Measurement of Returns.



The Intervaling Effect.

About the Authors and Contributors.


About the CD-ROM.