Showing papers on "Algorithmic trading published in 1975"

Asset Management with Trading Uncertainty

Abstract: It is our purpose in this paper to explore the connections between uncertainties inherent in the trading process and the holding of liquid assets, with the idea that the techniques we develop here are a step toward a unified theory of money, price formation and the trading process. What we call " trading uncertainty " is uncertainty about an agent's immediate opportunities to buy and sell. It is inherent in the operation of real markets when information cannot be transmitted or processed costlessly. Trading uncertainty must be sharply distinguished from the uncertainty about the state of the world and the equilibrium price pertaining to it, which is treated in the theories of portfolio choice and market allocation of risk.3 State of the world uncertainty concerns events like changes in endowments, technology and tastes that are generally taken as exogenous from the point of view of the economic relations of production and exchange. The major theme of the theory of state of the world uncertainty is the ability of agents to reduce private riskiness by exchanging goods in different states of the world, that is, by insurance or hedging, to evade some or all of the possible risk. The central fact about trading uncertainty is that it cannot be traded away perfectly, since it is inherent in the trading process itself. It could be eliminated only in a world where the transmission and processing of information was costless. The picture of market equilibrium of conventional theory explicitly rules out trading uncertainty since agents are supposed to be able to buy or sell any amount of any good at a known price. Trading uncertainty may enter in two guises depending on whether one views market disequilibrium in " Marshallian " or " Walrasian " terms. There may be several prices coexisting in the market at any moment, so that agents do not face a single known price. Or there may be only one price, but if it is not an equilibrium price agents cannot all buy or sell any amounts they want to. If excess supply or excess demand is in part rationed randomly, then agents will face trading uncertainty about their ability to buy or sell. Costless and instantaneous transmission and processing of information would eliminate any divergence of price at a given moment, and would also presumably rule out trading at a disequilibrium price. This is the case studied by conventional theory (even with the

Market-making and the assessment of market efficiency

Abstract: IN ASSESSING the efficiency of a trading market, two criteria are relevant.' First, can transactions take place in the market at relatively low cost? Second, are there opportunities for systematic profit as a result of serial correlation in price series? That is, are there market imperfections which prevent price from fully and immediately reflecting new information? These two criteria are applicable in evaluating a principal agent in organized trading markets-the market maker. They contrast, however, with the methods of evaluation currently used by the New York Stock Exchange and the Securities and Exchange Commission which focus on price continuity and price stabiliy and which may in fact tend to create inefficiency by causing price dependencies.2 This paper examines market-maker behavior. It argues that the chief cost of dealing with a market-maker is the difference between the theoretical but unobservable equilibrium price and the transaction price, rather than the bid-ask spread. A distinction is made between two types of trading, liquidity trading and information trading. The paper concludes that in both types of markets a competitive market-maker will perform more satisfactorily than a monopolistic market maker and that regulatory criteria are unnecessary. Organization follows these lines. Section II provides some background to the study of the market-maker. In Section III, price behavior in a market withough a market maker is discussed. Market-maker behavior in

Reducing the Cost of Stock Trading

Abstract: (1975). Reducing the Cost of Stock Trading. Financial Analysts Journal: Vol. 31, No. 6, pp. 35-44.