Foucault–Pagano–Röell Reading Map
Thierry Foucault, Marco Pagano, and Ailsa Röell, Market Liquidity: Theory, Evidence, and Policy. Oxford University Press, 2013. ISBN 978-0-19-993624-3. DOI 10.1093/acprof:oso/9780199936243.001.0001.
This source complements Harris. Harris gives us participant motives and institutional vocabulary; Foucault, Pagano, and Röell give us models and evidence for the trading process itself—especially liquidity, price discovery, order flow, trade size, the limit order book, fragmentation, and transparency.
The supplied file is the 2013 first edition. It is suitable for the foundational chapters below. A later revision should consult the 2023 second edition and current venue specifications for algorithmic trading, high-frequency market making, fragmentation, regulation, and recent evidence.
Primary reading path
| Our part | Source chapters | Purpose |
|---|---|---|
| Market Mechanics | Introduction; 1 | Why real trading differs from frictionless exchange; dealer and auction mechanisms; trading rules |
| Market Microstructure | Introduction; 2–4; 6–8 | Liquidity measurement, order flow, depth, limit order books, fragmentation, and transparency |
| Execution | 2; 4; 6–7 | Trading costs, trade size, order choice, venue choice, and execution conditions |
| Market Making | 3–4; 6 | Price dynamics, inventory absorption, depth, and limit-order supply |
| Data and Empirical Work | 2–5 | Liquidity measures, empirical price dynamics, depth, and estimation |
| Mathematical Models | 3–4; 6–9 | Order-flow models, trade-size models, equilibrium liquidity, and asset-pricing implications |
Chapter-level assignments
- Introduction → the gap between frictionless asset-pricing models and real trading; market liquidity; price discovery; the interaction of market, funding, and monetary liquidity.
- Chapter 1, Trading Mechanics and Market Structure → rules of the game, dealer markets, continuous limit order books, call auctions, hybrid structures, and transparency.
- Chapter 2, Measuring Liquidity → spreads, price impact, execution costs, and the limits of any single liquidity statistic.
- Chapter 3, Order Flow, Liquidity, and Securities Price Dynamics → informed and uninformed order flow, price response, and liquidity provision.
- Chapter 4, Trade Size and Market Depth → quantity, depth, and price concessions.
- Chapter 5, Estimating the Determinants of Market Illiquidity → empirical identification and estimation.
- Chapter 6, Limit Order Book Markets → endogenous order choice and liquidity supply in a book.
- Chapter 7, Market Fragmentation → competition, concentration, and venue choice.
- Chapter 8, Market Transparency → displayed information and participant behavior.
- Chapter 9, Liquidity and Asset Prices → liquidity premia and funding-liquidity feedback.
- Chapter 10, Liquidity, Price Discovery, and Corporate Policies → consequences beyond the trading desk.
How we will use it
This book will not copy the source’s chapter order. Each chapter starts with an observable mechanism, then introduces the smallest model needed to explain it. The source provides hypotheses and modeling discipline; current exchange specifications and empirical papers must establish contemporary facts.
For each borrowed model, state:
- Which participants are present.
- What each participant knows and observes.
- What actions the mechanism permits.
- How and when orders meet.
- Which quantity the model predicts.
- What real-world feature the model deliberately leaves out.
First-edition boundary
Treat the first edition as authoritative for durable definitions and foundational mechanisms, not for the current state of electronic markets. The following always need newer verification:
- Venue ownership, market share, and trading protocols.
- Order types, matching rules, and transparency regimes.
- Tick sizes, fees, access, and market-data products.
- The prevalence and effects of high-frequency and algorithmic trading.
- Regulatory requirements and market-design reforms.
- Quantitative claims tied to a particular sample or historical episode.