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Showing papers on "Algorithmic trading published in 1988"


Journal ArticleDOI
TL;DR: In this paper, the authors developed a theory that concentrated trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders and provided a partial explanation for some of the recent empitical findings concerning the patterns of volume and price variability in intraday transaction data.
Abstract: This article develops a theory in which concentrated-trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders. Our results provide a partial explanation for some of the recent empitical findings concerning the patterns of volume and price variability in intraday transaction data. In the last few years, intraday trading data for a number of securities have become available. Several empirical studies have used these data to identify various patterns in trading volume and in the daily behavior of security prices. This article focuses on two of these patterns; trading volume and the variability of returns. Consider, for example, the data in Table 1 concerning shares of Exxon traded during 1981.1 The U-shaped pattern of the average volume of shares traded-namely, the heavy trading in the beginning and the end of the trading day and the relatively light trading in the middle of the day-is very typical and has been documented in a number of studies. [For example,Jain andJoh (1986) examine hourly data for the aggregate volume on the NYSE, which is reported in the Wall StreetJournal, and find the same pattern.] Both the variance of price changes

3,315 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined intraday transaction data for S&P 500 stock index futures prices and the quotes for the underlying index and found that the futures price changes are uncorrelated and that the variability of these price changes exceeds the variability in price changes in the S-P 500 index.
Abstract: this article examines intraday transaction datafor S&P 500 stock indexfutures prices and the intraday quotes for the underlying index. The data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the S&P 500 index. this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes, which induces autocorrelation in the index changes. We advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value: that this "mispricing" increases on average with maturity, and that it is path-dependent. Evidence supporting these hypotheses is presented.

379 citations


Journal ArticleDOI
TL;DR: In this article, the authors investigated the information content of aggregate insider trading by analyzing sixty thousand open-market sales and purchases by insider s from January 1975 to October 1981 and found that insiders cannot always distinguish between the ef fects of firm-specific and economywide factors.
Abstract: This study investigates the information content of aggregate insider trading by analyzing ap proximately sixty thousand open-market sales and purchases by insider s from January 1975 to October 1981. The paper first examines the rel ation between market movements and aggregate insider trading. The evi dence suggests that insiders cannot always distinguish between the ef fects of firm-specific and economywide factors. The paper also invest igates whether publicly-available information about aggregate insider trading activity can help predict future stock-market returns and pr ovide market analysts with market timing ability. Copyright 1988 by the University of Chicago.

366 citations


Journal ArticleDOI
TL;DR: The authors empirically investigated the relation between common stock and call option trading volumes and found that trading in call options leads to trading in the underlying shares, with a one-day lag, and the relationship between absolute value of price changes and volume is positive and linear if one accepts a sequential information-arrival hypothesis as valid.
Abstract: This research empirically investigates the relation between common stock and call option trading volumes. The paper hyothesizes and tests a sequential flow of information between the stock and option markets. If information trading for CBOE-listed firms is predominantly accomplished through option trading, then existing research methodologies may be biased against finding any significant economic consequences in those instances where option listing is an important variable. Results indicate that trading in call options leads trading in the underlying shares, with a one-day lag. BLACK [2] SUGGESTS THAT INFORMATION traders may prefer trading in options rather than shares due to economic incentives provided by reduced transaction costs, capital requirements, and trading restrictions and due to the greater action afforded by option trading. Manaster and Rendleman [12] empirically support Black's [2] option-information trading preference, finding incremental information content in option prices up to twenty-four hours prior to its reflection in stock prices. Jennings and Starks [10] report that the stock price-adjustment process upon arrival of new information differs for those firms listed on the Chicago Board Option Exchange (CBOE), and they demonstrate that stock price adjustment to new information occurs more rapidly for firms with listed call options. The results in both papers appear to warrant consideration of an optiontrading variable in the design of empirical tests. Both Manaster and Rendleman [12] and Jennings and Starks [10] investigate the price relation between shares and call options; this paper investigates trading volume. Copeland [4] posits the use of trading volume as a proxy for the rate of information arrival. He concludes that the relation between absolute value of price changes and volume is positive and linear if one accepts a sequentialinformation-arrival hypothesis as valid. The present research hypothesizes and tests a sequential flow of information between the stock and option markets. Analyses presented are based on econometric tests for causality1 derived from the works of Granger [6] and Sims [22]. If information trading takes place

234 citations


Journal ArticleDOI
TL;DR: In this article, the authors argue that futures trading increases stock market volatility, and do not predict the stock market's future volatility, but do not forecast the future volatility of stocks.
Abstract: (1988). Does Futures Trading Increase Stock Market Volatility? Financial Analysts Journal: Vol. 44, No. 1, pp. 63-69.

227 citations



Journal ArticleDOI
TL;DR: This paper found that short-term traders are the marginal investors in high-yield stocks, primarily since the introduction of negotiated commissions on the NYSE, and that this phenomenon is not evident in low-yielding stocks, nor does it appear prevalent before negotiated commissions.

184 citations


Journal ArticleDOI
TL;DR: In this paper, the authors simulated twelve technical systems for a portfolio of twelve commodities from 1978 to 1984 in order to test for market disequilibrium, and found that the trading of twelve technical system is a better description of short run futures price movements than the random walk model.
Abstract: Trading of twelve technical system is simulated for a portfolio of twelve commodities from 1978 to 1984 in order to test for market disequilibrium. Results differ substantially by trading system. Seven systems produced significant gross returns. Four of the twelve trading sytems produced significant net returns and significant risk-adjusted returns. These results show that disequilibrium models are a better description of short-run futures price movements than the random walk model. They also suggest that there may be additional causes of disequilibrium beyond transaction costs and risk aversion.

158 citations


Journal ArticleDOI
TL;DR: In this paper, the profitability performance of a multi-component technical trading system incorporating price, volume, and relative strength indicators on individual security is evaluated, and the authors conclude that relative strength may be a legitimate contender for inclusion in multi component equity ranking strategies.
Abstract: M any people claim to use technical trading rules capableof ”beating the market.” Most academicians and even some members of the financial community doubt the usefulness of such rules, pointing to the repeated failures of simple price-based filters to withstand the rigors of scientific study as evidence. ’ Recent work, however, suggests that there may be more to some technical analysis than meets the eye. Epps (1975) and Smirlock and Starks (1985) suggest that there is a positive correlation between the absolute value of price changes in the market and changes in transaction volume. In a similar article, Rogalski (1978) states that a knowledge of both prices and transaction volume information may be more valuable in predicting future stock movements than prices alone. Bohan (1981) and Brush (1986) scientifically examine the usefulness of relative strength indicators and document a considerable degree of price persistence. Indeed, Brush concludes that relative strength “may be a legitimate contender for inclusion in multi-component equity ranking strategies.” This study attempts to directly determine the profitability performance of a multi-component technical trading system incorporating price, volume, and relative strength indicators on individual security is55

114 citations


Journal ArticleDOI
TL;DR: In this article, the same factors that make futures contracts nonredundant securities also explain the existence, in equilibrium, of price disparities between futures contracts and over-the-counter dealer spot markets.
Abstract: Earlier studies report signfficant price disparities betweenfutures andforward or spot markets. Examining the Treasury-bill markets, this article demonstrates that differences in market trading structures explain these disparities. Treasury-billfutures rates contain significantly lower liquidity and default premia than do syntheticforward rates. this reflects the functioning of a futures' clearing association and differences between an open-outcry auction futures market and an over-the-counter dealer spot market. The same factors that make futures contracts nonredundant securities also explain the existence, in equilibrium, of price disparities.

58 citations


Book
01 Jan 1988
TL;DR: One of the most widely read books among active option traders around the world, "Option Volatility & Pricing" has been completely updated to reflect the most current developments and trends in option products and trading strategies as mentioned in this paper.
Abstract: One of the most widely read books among active option traders around the world, "Option Volatility & Pricing" has been completely updated to reflect the most current developments and trends in option products and trading strategies. It covers pricing models, volatility considerations, basic and advanced trading strategies, and risk management techniques. Written in clear, easy-to-understand fashion, the book points out the key concepts essential to successful trading.Drawing on his experience as a professional trader, author Sheldon Natenberg examines both the theory and reality of option trading. He presents the foundations of option theory, and shows how this theory can be used to identify and exploit trading opportunities. He explains a wide variety of trading strategies and shows how to select the strategy that best fits each trader's view of market conditions and individual risk tolerance. The new sections include: expanded coverage of stock option; strategies for stock index futures and options; a broader, more in-depth discussion volatility; analysis of volatility skews; and intermarket spreading with options.

Journal ArticleDOI
TL;DR: The events in the equity markets on the days surrounding Monday, October 19, 1987 have been variously described as a meltdown, a crash, a debacle, a break, a collapse, a panic, and "God-or somebody-sending us a signal" as discussed by the authors.
Abstract: T he events in the equity markets on the days surrounding Monday, October 19, 1987 have been variously described as a meltdown, a crash, a debacle, a break, a collapse, a panic, and "God-or somebody-sending us a signal." In less than a week, equity values fell more than 30 percent; in one day alone, the Dow Jones Industrial Average fell 508 points, or more than 22 percent, while the most active stock index futures contract price fell more than 28 percent. Coincident with the dramatic drop in prices was an equally dramatic rise in trading volume; more than 600 million shares traded on the New York Stock Exchange on the 19th and the 20th, three times the September 1987 daily average. Furthermore, the heavy trading volume occurred amidst numerous opening delays and trading halts for individual stocks; on October 20, the New York Stock Exchange reported 92 opening delays and 175 subsequent trading halts, while the Chicago Mercantile Exchange halted trading in its stock index futures contract for 46 minutes. The demands placed on communications systems by this combination of heavy trading and sporadic halts made it much more difficult for participants to get reliable information about order executions and fund transfers. Growing doubts about the integrity of the trading, clearing, and settlement mechanisms exacerbated the gridlock and threatened the entire system. These events provoked widespread public concern about the operations of the stock and stock index futures contract markets. Virtually every exchange, industry group, and government agency concerned with the equity markets responded with an investigation of its own. In addition, President Reagan created the Presidential Task Force on Market Mechanisms (hereafter referred to as the "Task Force") to investigate these events and to report to him within sixty days. Our discussion here will rely



Journal ArticleDOI
TL;DR: In this paper, the authors examined the over-the-counter market activities for stocks temporarily suspended by the New York Stock Exchange (NYSE) and found that the same stocks exhibited significantly greater volatility in the OTC market.
Abstract: This paper examines the over-the-counter (OTC) market activities for stocks temporarily suspended by the New York Stock Exchange (NYSE). Unlike previous studies, we use transaction-to-transaction data on the NASDAQ during NYSE trading halts to investigate the price adjustment process between market equilibria. The evidence indicates that while being halted by the NYSE, the same stocks have exhibited significantly greater volatility in the OTC market. Since the volatile price movement is mainly random and provides no arbitraging opportunities for the OTC market traders, we do not find support for the proposal that trading halts should be mandatory for all trading locations.

Journal ArticleDOI
TL;DR: In this article, the authors present an analysis of the relationship between program trading and computer trading in the context of equity trading, program trading, portfolio insurance, computer trading, and all that.
Abstract: (1988). Equity Trading, Program Trading, Portfolio Insurance, Computer Trading and All That. Financial Analysts Journal: Vol. 44, No. 4, pp. 29-38.


Journal ArticleDOI
TL;DR: In this paper, the authors examined the conclusions and analyses contained in these reports and provided a summary of their recommendations, focusing on the allegation that stock index futures trading was a significant factor in the 1987 stock market crash.
Abstract: Within four months of the stock market crash on October 19, 1987, there were six studies of what happened. The Brady Commission, the Commodity Futures Trading Commission, the Securities and Exchange Commission, the General Accounting Office, the New York Stock Exchange, and the Chicago Mercantile Exchange all produced reports that described and analyzed the Crash, and in some cases made recommendations for additional regulation. This paper examines the conclusions and analyses contained in these reports and provides a summary of their recommendations. Particular attention is given to the allegation that stock index futures trading was a significant factor in the Crash. In addition, the recommendations that higher margins be imposed on futures transactions and that formal trading halts be instituted in both the futures and stock markets are discussed in depth. A major conclusion of this review is that new market-making procedures are needed to cope with the growing institutionalization of trading in equity and equity-derivative markets.

Journal ArticleDOI
TL;DR: In this article, the authors reviewed the arguments concerning the role and effects of insider trading and argued that legal market research can explain much of the runup in a target firm's stock price before a tender offer is formally announced.
Abstract: This paper reviews the arguments concerning the role and effects of insider trading. In reviewing the law of insider trading, we concentrate on the main elements of the regulatory framework and court interpretations. We discuss economic issues involved in the debate over the benefits and costs of insider trading. Finally, we discuss evidence illustrating that legal market research can explain much of the runup in a target firm's stock price before a tender offer is formally announced.

Journal ArticleDOI
TL;DR: In this paper, the authors propose to improve the stock market mechanism by addressing the proper role of market makers, the lack of accountability of the mechanism to customers, and the differences between panics and crashes.
Abstract: To develop improvements in the stock market mechanism which would help prevent another "market break," it is important to understand the structure of the mechanism for stock market trading. Market makers and index arbitragers are only intermediaries between the patient and impatient traders who ultimately determine prices. Institutions for maintaining trust based upon accountability to customers in securities trading are scarce. The events of October 1987 unfolded as two distinct sets of events: a crash in which impatient sellers overwhelmed patient buyers, and a panic in which solvency worries took traders out of the markets. Proposals to improve the stock market mechanism should address the proper role of market makers, the lack of accountability of the mechanism to customers, and the differences between panics and crashes.

Journal ArticleDOI
Ross M. Miller1
TL;DR: This paper examines how the market mechanism can be made more “intelligent,” so that it can provide much of the stabilization currently left to the computer-driven arbitrage activities of independent traders while at the same time enhancing market liquidity.
Abstract: Initial studies of the stock market crash of October 1987 indicate that insufficient linkages between related securities markets, exacerbated by computerized trading, can lead to market instability. This paper examines how the market mechanism can be made more “intelligent,” so that it can provide much of the stabilization currently left to the computer-driven arbitrage activities of independent traders while at the same time enhancing market liquidity. This intelligent market mechanism employs techniques derived from concurrent control theory to link markets together in a way that effectively creates new, synthetic securities markets that coexist with current securities markets. This mechanism permits continuous trade in all markets so that the stabilizing activities of arbitrage occur as a direct by-product of the basic operation of the market mechanism. When the speed of communication between markets is fast relative to the pace of trading, this mechanism will operate so that at the operational level it is completely transparent to traders in the market, giving the appearance of a single, fully-linked free market system. This mechanism and the principles upon which it is based have broader applications to computerized markets in manufacturing and the service industries beyond financial markets.



Journal ArticleDOI
TL;DR: In this article, the authors argue that the crash had important implications in the struggle for international financial hegemony, and they propose an explanation of the crash based on the notion of real and financial overinvestment in the securities industry.
Abstract: The October 1987 stock market crash was remarkable on a number of counts, many of which are treated in this issue and elsewhere .' From our viewpoint the most interesting feature of the crash was its international dimensions. The crash was transmitted from Wall Street to other major financial centres both with unprecedented rapidity and with apparent disregard for the underlying state of national economies . Moreover we argue below that the crash had important implications in the struggle for international financial hegemony . Since the crash a bear market has persisted on all the major stock exchanges although the exact nature of price movements has varied as between exchanges . This has been the case even for the Japanese financial markets which are linked to arguably the healthiest real economy among the leading capitalist countries comprising the G7 (Group of Seven). The other significant post-crash feature has been the shakeout among us and European securities houses. This paper is organised as follows . First we sketch out the international background to the crash by examining developments in international financial markets in the 1970s and 1980s. Of particular interest is the pivotal role London had come to play in these processes. Second we propose an explanation of the crash based on the notion of real and financial overinvestment in the securities industry . This, it is argued, was the underlying basis of the crash and is able to encompass other partial explanations. Finally we look at the aftermath of the crash and draw some tentative conclusions .

Book
01 Jan 1988
TL;DR: In this article, the authors provide advice on selecting a stockbroker and explain various aspects of trading and investing, including margin accounts, investment clubs, and mutual funds, as well as explain various types of trading strategies.
Abstract: Offers advice on selecting a stockbroker and explains various aspects of trading and investing, including margin accounts, investment clubs, and mutual funds.


Journal ArticleDOI
TL;DR: In this paper, the authors claim that program trading and stock index futures and options have not added to volatility and that regulation could well increase it, and they also point out that regulation may increase volatility.
Abstract: ’Program trading’and stock index futures and options are often blamed for stock market volatility, and especially so after the Crash. Professor Tyler Cowen, of the University of California at Irvine, claims that these new trading techniques have not added to volatility and that regulation could well increase it.