Showing papers on "Algorithmic trading published in 1983"

The price variability-volume relationship on speculative markets

Abstract: This paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets. Our work extends the theory of speculative markets in two ways. First, we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day. And second, we determine how this joint distribution changes as more traders enter (or exit from) the market. The model's parameters are estimated by FIML using daily data from the 90-day T-bills futures market. The results of the estimation can reconcile a conflict between the price variability-volume relationship for this market and the relationship obtained by previous investigators for other speculative markets. THIS PAPER CONCERNS the relationship between the variability of the daily price change and the volume of trading on speculative markets. Previous empirical studies [2, 3, 6, 12, 14, 16] of both futures and equity markets always find a positive association between price variability (as measured by the squared price change Ap2) and the trading volume.2 There are two explanations for the relationship. Clark's [2] explanation, which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic, emphasizes randomness in the number of within-day transactions. In Clark's model the daily price change is the sum of a random number of within-day price changes. The variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions. Clark argues that the trading volume is related positively to the number of within-day transactions, and so the trading volume is related positively to the variability of the price change. The second explanation is due to Epps and Epps [6]. Their model examines the mechanics of within-day trading. The change in the market price on each within-day transaction or market clearing is the average of the changes in all of the traders' reservation prices. Epps and Epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price. That is, an increase in the extent to which traders disagree is associated with a larger absolute price change. The price variability-volume relationship arises, then, because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices.

Automated futures trading exchange

Abstract: A computerized open outcry exchange system for transacting sales of a particular futures commodity contract by members of a futures trading exchange wherein bids to purchase or offers to sell the particular commodity contract are made by the members through remote terminals and the exchange computer automatically matches offers and bids to complete the transaction.

Short term impact of option trading on underlying securities

Abstract: This paper examines the short-term impact of option listing before and after the moratorium. There is no clear evidence that option trading has an effect on volatility or variability of shares traded daily. However, when the results are evaluated by year of trading, two significant trends can be identified. A trend toward decreased price volatility and increased variability in the number of shares traded daily is shown in the underlying security shortly after option trading begins.

Futures Trading, Market Interrelationships, and Industry Structure

Abstract: Futures markets arise as a response to economic uncertainty. One goal of this paper is to measure how futures trading in existing contracts changes in response to changes in uncertainty caused by inflation. A difficult issue that other researchers have addressed is why only a small handful of all markets have successful futures markets (see, e.g., Telser and Higginbotham). Although we do not provide a complete answer to this question, we make progress toward an answer by investigating the covariance structure of various futures prices. This allows us to predict which markets are the least needed and to see whether

Stock Market Efficiency and Price Predictions Implicit in Option Trading

Abstract: The Black-Scholes option pricing model (with approximate adjustments for dividends and exercise price changes) was used to generate stock prices which are “implied” by the model. If the stock market is efficient, these implied prices should not be capable of being used profitably by traders. This hypothesis is tested using prices established in the Australian Options Market and the Sydney Stock Exchange over the period February 1976 to December 1980. A close correspondence is found between implied stock prices and actual stock prices. Tests of the predictive power of the implied prices were unable to discover evidence of market inefficiency. However, a simulated trading strategy executed over one trading day and based on the largest discrepancies between actual and implied prices did meet with some success.

The Forward Market in Foreign Exchange: A Study in Market-making, Arbitrage and Speculation

Abstract: Originally published in 1983. With the prevailing uncertainties and wild fluctuation in exchange values at the time, the forward market in foreign exchange had become a vital issue for both governments and business corporations. This book by an expert practitioner in foreign exchange dealing describes how the forward market functions and analyses the constituent elements in its behaviour. The two principal types of foreign exchange deal are examined; forward outright and swap, and explanations are given of how both operate. The linkage between forward rates and interest rates is also considered and the book investigates what factors cause deviation from parity conditions. In addition, there is a discussion of political risk and the forward contract and the role of speculation in forward exchange as well as the methods of hedging.

Exchange-rate Intervention: Arbitrage and Market Efficiency

Abstract: Under the Bretton Woods system of pegged rates of exchange between currencies, intervention by the United States in the currency market was redundant, since the monetary authorities abroad determined the foreign-exchange rate of the dollar as they bought and sold their own currencies within the support limits around their parities. With the breakdown of the Bretton Woods system, the authorities in the United States faced a new problem—should they intervene in the foreign-exchange market or should they instead follow a policy of benign neglect, so that the value of the American dollar, in terms of various other currencies, would be determined by some combination of market forces and the intervention policies of foreign monetary authorities? Prior to the breakdown, it was generally believed that official intervention would be far less extensive with a floating exchange-rate regime; the irony, however, is that official transactions in reserve assets have been substantially larger under the floating exchange-rate system than under the pegged exchange-rate system.