Chapter 16 is basically the Warren Buffett chapter. Not that Harris mentions Buffett by name, but the whole idea of value trading is: figure out what something is really worth, wait for the market to misprice it, buy low, sell high. That is the entire philosophy in one sentence. The hard part is everything else.
Say you manage a pension fund and you need to sell 500,000 shares of some stock. You cannot just drop a market order on the exchange. The order book does not have that much liquidity sitting around. If you try to force it through, you will eat through every level of the book and crash the price on yourself. Chapter 15 is about how these giant trades actually get done.
In Chapter 28, Larry Harris looks at the scariest moments in financial history: Bubbles and Crashes. These aren’t just “volatility”; they are moments where the relationship between price and reality completely breaks down.
In Chapter 27, Larry Harris looks at the ultimate showdown: The Floor vs. The Computer. In an age of high-speed fiber optics, why do we still have people in colorful jackets yelling at each other in lower Manhattan?
In Part 1 we covered dealer spreads, the two spread components (transaction costs and adverse selection), and why uninformed traders lose no matter what order type they use. Now Harris finishes the chapter with equally important stuff: what determines equilibrium spreads in real markets, how public traders compete with dealers, and what factors predict whether a given instrument will have wide or narrow spreads.
In Chapter 26, Larry Harris looks at the high-stakes competition between the marketplaces themselves. If you’re a developer building an ECN or a regulator at the SEC, this is the battlefield.
Harris calls chapter 14 the most important chapter in the book. Bold claim for page 297, but he backs it up. The lesson is simple and painful: uninformed traders lose money no matter what they do. Not because they pick the wrong side. Because they trade at all.
In Chapter 25, Larry Harris explains why the stock market isn’t just one big room. It’s actually thousands of little private rooms all trying to steal business from the main floor. This is Market Fragmentation.
Dealers are merchants. They buy low, sell high, pocket the difference. If you ever bought a used phone from a resale shop, you understand the concept. The shop bought it for less, sells it to you for more. Financial market dealers do the same thing with stocks, bonds, and currencies.
So we made it. 17 posts later, and we’ve covered the entire “Behavioral Finance for Private Banking” by Thorsten Hens, Enrico G. De Giorgi, and Kremena K. Bachmann. That was a lot of ground.