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Showing papers on "Algorithmic trading published in 1989"


Journal ArticleDOI
TL;DR: In this paper, the authors consider the problem of off-exchange search in a two-market market, where trade is equally costly across markets and this externality leads to the concentration of trade on one market.
Abstract: Since the depth and liquidity of a market depend on the entry decisions of all potential participants, each trader assesses them according to conjectures about entry by others. If trade is equally costly across markets, this externality leads to the concentration of trade on one market. If not, it can produce multiple conjectural equilibria, some where trade concentrates on one market and others where large traders resort to a separate market or to search for a trading partner. While fragmentation is welfare-reducing in the two-market case, no such ranking is possible if it involves off-exchange search.

618 citations


Journal ArticleDOI
TL;DR: In this paper, the response of marketmakers to the existence of traders with private information is to reduce the liquidity of the market and the institution of the monopolist specialist may ease this inefficiency somewhat by increasing the market liquidity.
Abstract: Trading on private information creates inefficiencies because there is less than optimal risk sharing This occurs because the response of marketmakers to the existence of traders with private information is to reduce the liquidity of the market The institution of the monopolist specialist may ease this inefficiency somewhat by increasing the liquidity of the market While competing marketmakers will expect a zero profit on every trade, the monopolist will average his profits across trades This implies a more liquid market when there is extensive trading on private information Copyright 1989 by the University of Chicago

537 citations


Book
01 Jan 1989

399 citations


Journal ArticleDOI
TL;DR: In this paper, the authors assess the welfare effects and incidence of such noice trading using an overlapping-generations model that gives investors short horizons, and find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and part of that cost may be borne by rational investors.
Abstract: Recent empirical research has identified a significant amount of volatility in stock prices that cannot easily be explained by changes in fundamentals; one interpretation is that asset prices respond not only to news but also to irrational “noise trading.” We assess the welfare effects and incidence of such noice trading using an overlapping-generations model that gives investors short horizons. We find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and we show that part of that cost may be borne by rational investors. We conclude that the welfare costs of noise trading may be large if the magnitude of noise in aggregate stock prices is as large as suggested by some of the recent empirical litrature on the excess volatility of the market.

287 citations


Journal ArticleDOI
TL;DR: In this article, five-minute changes in the S&P 500 index and futures contract were examined over a ten-day period surrounding the 1987 stock market crash, and new index estimators were derived and used.
Abstract: Five-minute changes in the S&P 500 index and futures contract are examined over a ten-day period surrounding the October 1987 stock market crash. Since nonsynchronous trading problems are severe in these data, new index estimators are derived and used. The estimators use the complete transaction history of all 500 stocks. Nonsynchronous trading explains part of the large absolute futures-cash basis observed during the crash. The remainder may be due to disintegration of the two markets. Even after adjustment for nonsynchronous trading, the index displays more autocorrelation than does the futures and the futures leads the index.

182 citations


Posted Content
TL;DR: In this article, the authors provide a plausible explanation for the remarkable growth in the popularity of the stock index futures market over the past few years, and suggest that large financial institutions may be expected to trade heavily in baskets to satisfy the liquidity needs of their clients.
Abstract: This paper provides a rationale for markets in baskets of securities (e.g. the stock index futures markets) by demonstrating that they provide a convenient trading medium for liquidity traders. The reason advanced is that the transaction costs suffered by these liquidity traders due to adverse trades with informed traders will typically be lower in markets for baskets than in markets for individual securities. The paper implies that large financial institutions may be expected to trade heavily in baskets to satisfy the liquidity needs of their clients. Thus, the paper provides a plausible explanation for the remarkable growth in the popularity of the stock index futures market over the past few years

95 citations


Journal ArticleDOI
01 Sep 1989

73 citations


Journal ArticleDOI
TL;DR: In this article, the authors apply the original variance bounds tests to the present value model for the U.K. stock market and amend these tests to take account of revisions in the model's parameters.
Abstract: The authors apply the original variance bounds tests to the present value model for the U.K. stock market and amend these tests to take account of revisions in the model's parameters. They show that variance bounds tests that correct for this are no longer violated. However, they claim there is excess volatility if agents, restricted to using only current information to compute a trading rule, could make excess profits. They show that a trading rule exists which yields, in the long run, more than twice the wealth from buying than holding a representative market portfolio. Copyright 1989 by Royal Economic Society.

63 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined the properties of different market risk measures computed on daily data for a thin security market i.e. the Helsinki Stock Exchange in Finland and showed that differences in trading frequency between different stocks produce a serious bias towards what appears to be stability in estimated betas.
Abstract: This paper examines the properties of different market risk (beta) measures computed on daily data for a thin security market i.e. the Helsinki Stock Exchange in Finland. In accordance with the results by Dimson and Marsh (1983) the paper shows that differences in trading frequency between different stocks produce a serious bias towards what appears to be stability in estimated betas. Furthermore the paper shows that when betas are computed the exclusive use of stock prices based on actual trades will not solve the problem of a thin trading bias in measured stability of these beta estimates. In fact other methods proposed to cope with the thin trading problem seem to be at least as efficient as use of trade-to-trade returns. Finally betas corrected for differences in trading frequency are still shown to be statistically related for firm size.

59 citations




Journal ArticleDOI
TL;DR: This paper examined the relationship between program trading and price movements and concluded that index arbitrage does not appear to have played a major role in the 1987 market crash and portfolio insurance did not play a significant role in accelerating and exacerbating the declines.
Abstract: N The October 19, 1987 market crash fueled the debate as to the effect of program trading on market stability. The unprecedented price movement also provided a natural experiment to help resolve the debate and prompted the collection of program-trading data that had not previously been available. This study uses the new data to examine the relationship between program trading and price movements. Following the market crash, several institutions undertook studies that included analyses of program trading, but there is still no consensus as to the role of program trading in the crash. The Brady Report [2, p. 15] concludes that a "limited number of investors" using portfolio insurance "played a dominant role" during the crash. The SEC's Division of Market Regul tion report (hereafter referred to as the Division Report) asserts " 'program trading' [was] a significant factor in accelerating and exacerbating the declines" [22, p. xiii]. In contrast, the Commodity Futures Trading Commission report [4, p. 137] states that a "detailed examination of the trading data ... does not provide empirical support for the theory that hedging in the futures market and index arbitrage activities interacted to cause a technical downward price spiral of stock prices." Similarly, the Chicago Mercantile Exchange report [18, p. 56] concludes that (i) "index arbitrage does not appear to have played a major role in the crash," and (ii) although "portfolio insurance did conThis study has benefited from the comments of Brandon Becker, Ken Lehn, Mark Mitchell, Harold Mulherin, Rob Neal, Jeffry Netter, Stephen Newmark, Charles Trzcinka, Darrell Williams, and an anonymous referee. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of any of its employees. The views expressed here are those of the author and do not necessarily reflect the views of the Commission or the author's colleagues on the Staff of the Commission.

Journal ArticleDOI
TL;DR: In this paper, the authors discuss matters of economic interest related to the Japanese equity market and emphasize the futures market in shares of the companies that managed the stock exchanges as an important element of the pre-WWII market, the stock market crisis of 1965 as an event that conditioned the subsequent course of public policy and institutional developments, and the zaraba (continuous auction) method as the microstructure of the exchanges.
Abstract: This paper discusses matters of economic interest related to the Japanese equity market. Among other things, it emphasizes the futures market in shares of the companies that managed the stock exchanges as an important element of the pre-WWII market; the ‘stock market crisis’ of 1965 as an event that conditioned the subsequent course of public policy and institutional developments; the zaraba (continuous auction) method as the microstructure of the exchanges; and the uneven distribution of stock ownership and trading, the poor performance of investment trusts, and the high degree of concentration in the securities industry as the key contemporary features.

Journal ArticleDOI
Eric S. Schubert1
TL;DR: In this paper, exchange rate data are used to test how much arbitrage opportunities were exploited between London and Amsterdam during the 18th century, and it is shown that arbitrage was effective in the foreign exchange markets of London and Dutch during most of the period but broke down as a result of the wars of the French Revolution.


Journal ArticleDOI
TL;DR: In this article, the authors examined the behavior of the first two futures contracts on Japanese stock price indices to be traded, the Nikkei Stock Average (NSA) contract on the Singapore International Monetary Exchange (SIMEX), and the Osaka Stock Futures 50 (OSF50), and found significant departures between the actual prices of the contracts and their fair prices in the early months of trading from June 1987 to June 1988.

Book
01 Mar 1989
TL;DR: A comprehensive and authoritative description of the theory, creation, and use of mechanical trading systems can be found in this article, where historical tests of various trading systems approaches are presented in 10 markets over a 5 year period.
Abstract: Comprehensive and authoritative description of the theory, creation, and use of mechanical trading systems. Presents historical tests of various trading systems approaches in 10 markets over a 5 year period.

Book
01 Jan 1989
TL;DR: In this article, the authors describe new trading methods that have been developed in recent years, including passive trading, basket trading, crossing networks, sunshine trading, and electronic trading, as well as a critical examination of proposed alternative market structures.
Abstract: Institutional investors are under increasing pressure to control transaction costs and execute trades more quickly and efficiently. This book, which contains contributions by many well-known investment practitioners as well as some leading academics, explains how securities transactions are processed, reveals the true impact of transaction costs on investment performance, and describes new trading methods that have been developed in recent years, including passive trading, basket trading, crossing networks, sunshine trading, and electronic trading. A critical examination of proposed alternative market structures is also included. The text will be of interest to institutional investors, portfolio managers, financial industry professionals, students and academics.

Journal ArticleDOI
TL;DR: In this paper, program trading and systematic stock price behavior was studied in the context of stock price prediction, and the results showed that program trading was beneficial to stock price performance.
Abstract: (1989). Program Trading and Systematic Stock Price Behavior. Financial Analysts Journal: Vol. 45, No. 3, pp. 61-67.

Journal ArticleDOI
01 Sep 1989-Abacus
TL;DR: In this article, the authors present empirical evidence on insider trading, mainly reflecting United States experiences, challenges assumptions not only about the impact of insider trading but also the efficiency of financial markets.
Abstract: An understanding of the implications of insider trading can only be achieved by analysing conflicting perceptions of what is meant by inside or privileged information. Empirical evidence on insider trading, mainly reflecting United States experiences, challenges assumptions not only about the impact of insider trading but also the efficiency of financial markets. There are hierarchies of market participants and rules on insider trading capable of practical implementation will only change the rankings. Companies have a property interest in their inside information and should bear the responsibility for its use.

Posted Content
TL;DR: In this paper, the authors draw heavily on two previous studies on the profitability of technical trading systems in the foreign exchange market (Schulmeister, 1987) and in the stock market.
Abstract: This paper draws heavily on two previous studies on the profitability of technical trading systems in the foreign exchange market (Schulmeister, 1987) and in the stock market.

Book
21 Feb 1989
TL;DR: The emergence of global futures and options trading: the evolution of futures markets market regulation the clearinghouse and financial safeguards inter-market communications computers and the decision-making process as discussed by the authors.
Abstract: Part 1 The emergence of global futures and options trading: the evolution of futures markets market regulation the clearinghouse and financial safeguards inter-market communications computers and the decision making process. Part 2 The global trading information bank: futures and options exchanges - a worldwide directory major exchanges - contracts carried and other basic data exchange-related agencies and associations contract specifications by country and exchange volume distribution by country and exchange global trading hours and international holidays listing.




Journal ArticleDOI
TL;DR: In this paper, issues pertaining to the design of IS for security trading are addressed and four major issues are discussed: Segmentation of the trading process, Identification of trading objectives, technological requirements, and Management support, planning, and control.

Journal ArticleDOI
TL;DR: In this article, a Student Commodity Pool (SCP) was organized at Kansas State University to simulate actual trading more realistically, and twentynine students contributed $100 each to a pool account, formed groups to research and present trade recommendations and then traded actual futures and options contracts.
Abstract: Commodity paper trading games are widely used to give students experience in trading. One weakness of these games is that there are no monetary and only minor emotional consequences resulting from the students' trades. To simulate actual trading more realistically, a Student Commodity Pool (SCP) was organized at Kansas State University. Twenty-nine students contributed $100 each to a pool account, formed groups to research and present trade recommendations and then traded actual futures and options contracts. As an experiential learning method, most students gave the class high marks. Other instructors may be able to establish SCPs with approval from the Commodity Futures Trading Commission.


Journal ArticleDOI
TL;DR: In this paper, a Bayesian trading system is presented to forecast market trends and reversals, by estimating the market price distributions, and applying the optimal stopping rules to answer the question and control the trading system according to the a priori probability and risk preference of the investor.

Book
01 Jan 1989
TL;DR: In this article, the authors examined the stock price volatility-volume relationship and found that option trading can attenuate the asymmetric price change volume relationship, which is consistent with the notion that information flows to both the stock and the options markets when option trading is viable.
Abstract: The objective of this dissertation is to examine the stock price volatility-volume relationship. The dissertation begins with an estimation of the time deformation market model in which stock contemporaneous trading volume is utilized as a proxy for the rate of information arrival. This local time market model is economically appealing because it is capable of expllining the observed heteroskedasticity and leptokurtosis in daily return data. With a sample of firms which have stock splits, it is shown that the inferences drawn from a modified event study which incorpcrates the local time market model are similar to those drawn from a typical event study which uses the simple OLS market model. In order words, a typical event study which employs daily stock return data and the OLS market model yields robust inferences in spite of the violation of the normality assumption in daily return data. The time deformation market model is also able to show that the increase in price volatility induced by stock splits is due to a structural change in the relationship between economic time and calendar time. The impact of option introduction on the stock price volatility-volume relationship is investigated. The asymmetric price change-volume relationship is affected by option trading because option trading is capable of reducing the short selling constraints. Although exactly how option trading can affect the asymmetry is a complex matter, the empirical findings do give mild support to the hypothesis that option trading can attenuate the asymmetric price change-volume relationship. Option trading also influences the local time market model. Empirical evidence is supportive of a structural shift in the model. These findings are consistent with the notion that information flows to both the stock and the options markets when option trading is viable. Also, one-day-lagged option volume is important in explaining the conditional return variance.