Showing papers on "Algorithmic trading published in 1985"

Automated securities trading system

Abstract: Data processing based apparatus makes an automated trading market for one or more securities. The system retrieves the best obtaining bid and asked prices from a remote data base, covering the ensemble of institutions or others making a market for the relevant securities. Data characterizing each securities buy/sell order requested by a customer is supplied to the system. The order is qualified for execution by comparing its specifics against predetermined stored parameters. The stored parameters include the operative bid and asked prices, the amount of stock available for customer purchase or sale, and maximum single order size. Once qualified, the order is executed and the appropriate parameters are updated. The system provides inventory (position) control and profit accounting for the market maker. Finally, the system reports the executed trade details to the customer, and to national stock price reporting systems. Upon a change in the quoted price for a security, the system updates all relevant qualification parameters.

The Trading Decision and Market Clearing under Transaction Price Uncertainty

Abstract: This paper models an individual's trading decision, given: (1) his/her demand function to hold shares of an asset, (2) his/her expectation on what the market clearing price will be, and (3) the design of the market which determines how orders will be translated into trades. The particular market design we consider is the batched trading (periodic call) regime. Assuming investors are distributed according to their propensities to hold shares, we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which, with trading friction, these solutions differ from Pareto efficient values. The importance of this analysis for various issues concerning market design is noted. WHEN MARKETS ARE NOT frictionless and transaction prices are uncertain, the act of trading requires analysis. This paper models an individual's trading decision in secondary financial asset markets. In so doing, we study the order flow as an endogenous part of the system. We show how, given an underlying demand curve, the trader will choose an optimal (price, quantity) order to transmit to the market, and we model the aggregation of orders to obtain market clearing values for price and volume. These models are used to show the way in which the prices and trading volume established on the market will in general differ from their Pareto efficient values. Much of the microstructure literature that studies the behavior of transaction prices in a nonfrictionless market has assumed that orders are generated by some exogenously given stochastic process. This has been true, for instance, in the

Futures Trading and the Welfare Evaluation of Commodity Price Stabilisation

Abstract: It is notorious that commodity prices are volatile, and there is a substantial literature on the wisdom of complete or partial elimination of this volatility. The modern academic literature starts from Waugh (I944) who argued that consumers benefit from price volatility (since they can take advantage of low prices by increasing consumption) and Oi (I96I) who argued the parallel proposition for producers. Massell (I969), noting that Waugh had assumed supply side disturbances whilst Oi had assumed demand side disturbances, provided an integrated model. In the same spirit, Samuelson (I972) showed that, notwithstanding the contributions of Waugh and Oi, it will not be beneficial within a standard competitive market-clearing model to destabilise prices. The literature is surveyed in Turnovsky (I978). This raises the question of whether stabilisation can be justified in the context of a competitive free market in which private agents make optimal stockholding decisions (Wright and Williams (I982)). A number of authors (see for example Johnson (I967, ch. 5), have suggested that the fundamental theorem of welfare economics rules out such intervention. Standard arguments that would qualify this conclusion are superior governmental access to capital markets or information, and the assertion that stabilisation may result in a favourable redistribution of income. Newbery and Stiglitz (I98I) have stressed the rather more powerful argument that application of the fundamental theorem of welfare economics in an uncertain and explicitly intertemporal context requires the existence of a complete set of forward and contingent contracts markets. Futures (or forward) markets do exist for delivery of many important primary commodities at near dates, but this is far from sufficient to satisfy the prerequisites of the theorem since agents will use those markets which do exist as substitutes for those that are absent. Since, for example, moral hazard considerations prevent widespread trading of crop insurance contracts, farmers are obliged to obtain insurance against poor crops through the imperfect substitute of hedging on futures markets. The limited range of futures and contingent claims markets invalidates the argument that intervention can never be justified in welfare terms, but, at the same time, this only establishes the possibility of a justification for intervention. A specific case must be made for each market. Futures trading allows market transactors to fix their prices in advance of delivery. For example, a farmer may completely hedge by selling his entire

Empirical Tests of Boundary Conditions for Toronto Stock Exchange Options

Abstract: Using option and stock transaction data for the period 1978-1979, three issues were investigated: first, the conformance of observed prices to various boundary conditions; second, the evolution of the market over time, as the volume of trading and the number of listed options increased; and third, to test the efficiency of the market. It was found that violations did occur. Using a trading rule based on the signal of observed violations, the results suggest that even after transaction costs the market was inefficient over the sample period.

The Stock Market and the Commodity Futures Market: Diversification and Arbitrage Potential

Abstract: Historical relationships between the stock market and the commodity futures market, as proxied by the S&P 500 and the Commodity Futures Index, suggest that the S&P may have slightly outperformed the CFI over the 1978-81 period. In earlier years, however, the CFI clearly outperformed the S&P. Relative performances of the stock and commodities futures markets appear to be sensitive to investment horizon. Regression analysis indicates virtually no relationship between the rates of return of the two series. Risk and return, however, increase with horizon, whereas skewness and kurtosis are generally negatively related to horizon. Investors should be aware of these factors when selecting investment horizons. Investigation of the lead-lag relation between the two series confirms their independence. The S&P led the CFI by one day in 1969 and in 1972, while the two were instantaneously related in 1970. Data for 1973 through 1981 show complete independence, regardless of evaluation technique. These results suggest that commodity futures contracts may be used in conjunction with an equity portfolio to help reduce risks and enhance portfolio returns. Opportunities for profitable arbitrage between the two indexes are not likely, however.

Recent Developments of Interdealer Brokerage in the Japanese Secondary Bond Markets

Abstract: The large volume of government bonds issued since 1975 has been a strong driving force for structural change in the Japanese bond markets during the last decade. The increasing amount of outstanding government bonds has made the trading volume in the secondary market increase rapidly, accompanied with the development of interdealer trading. This interdealer trading system is an interesting and impressive phenomena, one that has developed as the Japanese bond market changed, and is important analytically as well. The development of this institution gives researchers an op? portunity to measure the increased efficiency of the developing market. This pa? per attempts to describe the development of these markets, point out the role that interdealer markets have played in improving the transactional efficiency of these markets, and document the benefits?in the form of lowered commission spreads (lowered liquidity cost)?that have accrued to the users of financial mar? kets in Japan as they pay less for the liquidity services provided by dealers. We will define transactional efficiency in this single dimension, lowered bid-ask spreads. Prior research in this area [4] has examined the conditions under which interdealer trading occurs in securities markets and pointed out that such trading may impose limits on the divergence of inventories among dealers that would decrease the market bid and ask spreads. In this paper, interdealer trading means the transactions of bonds among securities companies functioning as a dealer in the over-the-counter market (OTC market). To put it another way, the interdealer market could be regarded as a wholesale market, and the OTC market as a retail one. At present, trading is put into practice through three kinds of channels: the direct transactions among secu? rities companies, the Nihon Sohgo Shohken or bond broker (called BB), and the block trade of government bonds (BTGB) administrated by the Securities Ex? change. In the case of direct transactions, a dealer must seek out a compatible trading partner by himself. As discussed later, however, those transactions in the

The Trading Stock Valuation Adjustment: Some Extensions and Modifications

Abstract: This paper seeks independent confirmation of the research conclusions reached by Sinclair and Whittred (1982) regarding a capital market reaction to the introduction of the Trading Stock Valuation Adjustment (TSVA). This analysis extends and modifies that research and uses the date of the subsequent withdrawal of the TSVA to test for evidence of any reversal impact on the stock prices of the firms initially affected. We are unable to document such evidence.

A Price Reversal Test of the Market Impact of the Trading Stock Valuation Adjustment

Abstract: A ‘price reversal’ test of the market impact of the abolition of the Trading Stock Valuation Adjustment (TSVA) is performed. The data are consistent with a price reversal having occurred under some experimental conditions.