Trading and Exchanges by Larry Harris - A Book Retelling Series
So I just finished reading “Trading and Exchanges: Market Microstructure for Practitioners” by Larry Harris. And I have thoughts.
This is one of those books that’s been sitting on finance reading lists for years. Published in 2003 by Oxford University Press (ISBN: 0-19-514470-8), it’s basically the textbook on how markets actually work. Not the “buy low sell high” stuff you see on social media. The real mechanics. How orders flow, why spreads exist, what dealers actually do, and why some traders consistently lose money to others.
What This Series Is About
I’m going to retell this book chapter by chapter. My goal is to break down Harris’s ideas into something you can read over coffee without needing a finance PhD.
The book has 29 chapters split across seven parts:
- Part I - The Structure of Trading (Chapters 3-7): How the trading industry works, what types of orders exist, and how different market structures operate
- Part II - The Benefits of Trade (Chapters 8-9): Why people trade in the first place and what makes a market “good”
- Part III - Speculators (Chapters 10-12): Informed traders, front-runners, and market manipulators
- Part IV - Liquidity Suppliers (Chapters 13-18): Dealers, block traders, value traders, arbitrageurs, and buy-side traders
- Part V - Origins of Liquidity and Volatility (Chapters 19-20): Where liquidity comes from and why prices bounce around
- Part VI - Evaluation and Prediction (Chapters 21-22): How to measure trading costs and predict performance
- Part VII - Market Structures (Chapters 23-29): Index markets, specialists, market competition, automated vs floor trading, crashes, and insider trading
Why This Book Matters
Here’s the thing. Most people who trade stocks or crypto have no idea how the plumbing works. They open an app, tap buy, and assume magic happens. But between your tap and your filled order, there’s a whole ecosystem of market makers, brokers, exchanges, and regulators making it work.
Harris was a finance professor at USC and later became chief economist at the SEC. He wrote this book to explain market microstructure to practitioners - people who actually work in finance. But the concepts matter for anyone who puts money in markets.
Even though the book came out in 2003, the core ideas still hold up. Markets have changed a lot since then - high-frequency trading, crypto exchanges, payment for order flow - but the fundamental mechanics Harris describes are still how things work.
How I’ll Cover It
Each chapter gets its own post. Some longer chapters get split into two parts. I’m keeping things casual and focused on the ideas that actually matter. No academic jargon where I can avoid it.
I’ll link between posts so you can follow along in order or jump to whatever interests you.
Next up: Chapter 1 - Introduction
Let’s get into it.