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January 2022 Financial Market Microstructure Page 2 of 5 U Question 1 (2 marks) 1. (a) Using an example, differentiate between a stop loss order and stop buy order (b) All trading mechanisms can be viewed as variations of two basic market structures: Order Driven Markets and Quote Driven Markets i. Critically discuss how the two market structures work, making sure to highlight the differ- ences between them and any sub-structures that exist within these markets, if any (6 marks) ii. Discuss one advantage and disadvantage of call auction markets to traders (2 marks) (e) i. Using well labelled demand and supply curve diagrams, discuss the determination of the price at which orders are executed in call auction markets considering both limit and market orders. (6 marks) ii. How are the orders executed following price determination in the call auction market? Ex- plain in detail (4 marks) (d) Similar to the Kyle model on trade size and price dynamics, the empirical analysis by Glosten and Harris (1988) finds that not only the direction de of the trade, but also the size of trade may 9 convey price relevant information. Specifically they decompose price changes as: adverse selection AP = Jode + 114 + Adı + Y1A9+ OPC Critically explain the criticism of the Glosten and Harris (1988) model as levied by Huang and Stoll, hence outline (derive) the Three-Way decomposition showing how Huang and Stoll's (1997) specification resolves the criticism levied against Glosten and Harris (1988). (10 marks) Total for Question 1: 30 marks