Showing papers on "Algorithmic trading published in 1992"

Insider Trading: Should It Be Prohibited?

Abstract: Insider trading moves forward the resolution of uncertainty. Using a rational expectations model with endogenous investment level, I show that, when insider trading is permitted, (i) stock prices better reflect information and will be higher on average, (ii) expected real investment will rise, (iii) markets are less liquid, (iv) owners of investment projects and insiders will benefit, and (v) outside investors and liquidity traders will be hurt. Total welfare may increase or decrease depending on the economic environment. Factors that favor the prohibition of insider trading are identified.

Insider Trading and the Efficiency of Stock Prices

Abstract: We analyze several aspects of the debate on insider trading regulations. Critics of such regulations cite various benefits of insider trading. One prominent argument is that insider trading leads to more informationally efficient stock prices. We show that under certain circumstances, insider trading leads to less efficient stock prices. This is because insider trading has two adverse effects on the competitiveness of the market: it deters other traders from acquiring information and trading, and it skews the distribution of information held by traders toward one trader. We also discuss whether shareholders of a firm have the incentive to restrict insider trading on their own.

Market manipulation, bubbles corners and short squeezes

Abstract: This paper investigates market manipulation trading strategies by large traders in a securities market. A large trader is defined as any investor whose trades change prices. A market manipulation trading strategy is one that generates positive real wealth with no risk. Market manipulation trading strategies are shown to exist under reasonable hypotheses on the equilibrium price process. Sufficient conditions for their nonexistence are also provided.

The Reaction of Investors and Stock Prices to Insider Trading

Abstract: Trading by corporate insiders and their tippees is analyzed in Anheuser-Busch's 1982 tender offer for Campbell Taggart. Court records that identify insider transactions are used to disentangle the individual insider trades from liquidity trades. Consistent with previous studies, insider trading was found to have had a significant impact on the price of Campbell Taggart. However, the impact of informed trading on the market is complicated. Trading volume net of insider purchases rose. Contrary to the broad implications of adverse selection models, Campbell Taggart's liquidity improved when the insiders were active in the market, and the insiders received superior execution for their orders. THIS PAPER EXAMINES INSIDER trading surrounding the 1982 acquisition of Campbell Taggart, an NYSE-traded baking company, by Anheuser-Busch, the nation's largest brewer. News of the impending acquisition was leaked by one of the Anheuser-Busch directors and sequentially transmitted to a small group of individuals that proceeded to purchase a large amount of Campbell Taggart stock. During the criminal and civil litigation that followed this event, insider purchases were identified. We use the court records to isolate individual insider transactions from the flow of background trading, permitting analysis of the market's reaction to the onset of informed trading.1 Because the insider trading was not revealed to other market participants, the Campbell Taggart incident presents a unique laboratory for studying the dissemination and incorporation of private inside information into market

Dual Trading in Futures Markets

Abstract: With dual trading, brokers trade both for their customers and for their own account. We study dual trading and find that customers who are less likely to be informed have higher expected profits with dual trading while customers who are more likely to be informed have higher expected profits without dual trading. We also examine the effects of frontrunning. We test the major empirical implications of our model. Consistent with the model, dual traders earn higher profits than non-dual traders, and customers of dual-trading brokers do better than customers of non-dual-trading brokers. ONE OF THE MOST controversial issues facing futures traders, exchanges, and regulators is whether floor traders who act as brokers in bringing customers' orders to the market should also be allowed to trade for their own account. This practice-known as dual trading-traditionally has been permitted at futures exchanges and has received widespread attention since the January 1989 announcement of a Federal investigation into alleged trading abuses at Chicago futures exchanges. Critics of dual trading argue that it causes a conflict of interest between brokers and their customers. Advocates of dual trading claim that customers benefit because it reduces the cost of trading.' We develop a model of dual trading for the purpose of studying the effects of dual trading on futures prices and customer trading profits. In particular, we seek to identify who gains and who loses from dual trading. Our model is in the spirit of Glosten and Milgrom (1985) and addresses the role of the

Margin Requirements, Speculative Trading, and Stock Price Fluctuations: The Case of Japan

Abstract: An increase in margin requirements in the First Section of the Tokyo Stock Exchange is followed by a decline in margin borrowing, trading volume, the proportion of trading performed through margin accounts, the growth in stock prices, and the conditional volatility of daily returns. The nonmarginable Second Section stocks show a smaller change in volatility and only a delayed weak price response. The hypothesis that margin requirements restrict the behavior of destabilizing speculators can explain these correlations but cannot explain the observation that individuals, the most active users of margin funds, appear to be good market timers.

Rewards Available to Currency Futures Speculators: Compensation for Risk or Evidence of Inefficient Pricing?

Abstract: Filter, channel and moving-average trading rules are compared with rules which use ARIMA price forecasts, by evaluating their ex ante performance for currency futures transactions from December 1981 to November 1987. All of the trading rules are profitable. Market efficiency is discussed Monte Carlo results strongly suggest that the trading profits are too large to be explained by the elusive, time-varying risk premium sought in forward market literature

Intra‐Day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets

Abstract: We have two primary objectives in this study. First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one-way arbitrage. Our empirical analysis has been conducted using real-time quotations. The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one-way arbitrage. THE ROLE OF TRANSACTION costs in explaining the deviation of the actual forward price from the interest parity forward price has been studied extensively. Based on covered interest arbitrage, Frenkel and Levich (1975, 1977) have shown that the interest parity line is bound by a neutral band defined as:

Explaining the NYSE Listing Choices of NASDAQ Firms

Abstract: Traditionally, financial theory has offered little guidance to managers who must choose whether to list their stock on an exchange or allow it to continue trading over-the-counter. Recent developments in market microstructure theory allow a more careful analysis of the exchange listing decision. Market microstructure theory implies that firms list their stocks on exchanges to reduce transaction costs to their investors. A major component of the cost of trading common stocks is the bid-ask spread. Several differences exist between the trading arrangements, or microstructure, of the New York Stock Exchange and NASDAQ that may contribute to differences in bid-ask spreads for a given stock depending on where it is traded.

Do Moving Average Trading Rule Results Imply Nonlinearities in Foreign Exchange Markets

Abstract: This paper tests whether fitted linear models can replicate results from moment tests inspired by moving average technical trading rules for weekly foreign exchange series. Estimation is performed using standard OLS and maximum likelihood methods, along with a simulated method of moments technique which incorporates the trading rule moments into the estimation procedure. Results show that linear models are capable of replicating the trading rule moments along with the small autocorrelations observed in these series. This result holds for parameter values estimated using SMM and GARCH disturbances, but not for parameters estimated using maximum likelihood. The estimated models are simulated to examine the amount of predictability over long horizons.

The Design of Trading Systems: Lessons from Abroad

Abstract: To meet ever-increasing competitive pressures, markets in London, Paris, Toronto and Tokyo have modernized. The extensive automation of trading on the London Stock Exchange, for example, has enabled it to expand its listings offoreign securities signiflcantly. In response to competition from London, the Paris Bourse established a fully electronic trading system between 1986 and 1989. The Toronto and Tokyo exchanges have also adopted electronic trading systems.

The links between trading time and market volatility

Abstract: In this paper the impact of reduced New York Stock Exchange trading hours on stock return variance and trading volume is examined. Trading hours were reduced during the summers of 1945–52 by eliminating Saturday trading and in parts of 1968 by eliminating Wednesday trading. For the most part, these closings do not affect weekly volume or stock return variance. However, volume and variance are shifted from periods within the week with reduced trading hours to days following market closings. This is consistent with reduced trading temporarily reducing the transmission of private information into market prices.

Neural Network Futures Trading - A Feasibility Study

Abstract: The trading environment is fast paced and increasingly automated in line with new developments in information technology and global communications. Current trading software is predominantly analysis-based using traditional statistical methods to identify trends in price movements. Traders are continuously searching for new methods to help; them with their predictions and to gain an advantage over the competition. Artificial Intelligence is currently at the leading edge of these developments. This paper investigates the feasibility of employing a neural network package in this environment to predict the following day's closing price of German Government Bond (Bund) Futures Contracts on the London International Financial Futures Exchange (L.I.F.F.E.). The work considers the use of a particular neural network package with specific variables and was undertaken from the point of view of the futures trader with the assistance of a trader employed at a well-known American Investment Bank. “Markets are chaotic and their randomness is real but intermittent, we can approach the development of trading systems with that assumption. We can also assume that predictable intervals of non-randomness occur between periods of chaos, making market behaviour recognisable enough to be exploited. Two forms of technology have been notably successful in the development of dynamic trading systems: expert systems and, more recently, neural networks.” [1]

Slippage Costs in Order Execution for a Public Futures Fund

Abstract: The trading records of a commodity futures trading fund were examined to determine slippage on the fund's futures market transactions. Slippage was about double that found in previous research that included all traders. Slippage was largest on days with large price movements and for large orders. Funds appear to trade at times when the market is moving quickly and brokers have trouble filling orders at the target price. Since funds use similar systems, as a group they may be responsible for increasing intraday price movements because a large number of funds want to trade at the same time.

The Theory of futures markets

Abstract: Part 1 Risk in parial equilibrium: the theory of hedging and speculation in futures markets, P.A. Weller and M. Yano the theory of commodity price stabilization - a study in economics of risk, D.M.G. Newbery and J.E. Stiglitz. Part 2 Risk in general equilibrium: on the optimality of forward markets, R.A. Townsend hedging pressure and futures price movements in a general equilibrium model, D. Hirshleifer forward exchange, futures trading and spot price variability - a general equilibrium approach, P.A. Weller. Part 3 Information: risk allocation and information - some recent theoretical developments, K.J. Arrow rational expectations, information and asset markets - an introduction, M. Bray information, futures prices and stabilizing speculation, J.P. Danthine futures trading, rational expectations and the efficient market hypothesis, M. Bray. Part 4 Market liquidity: an analysis of the implications for stock and futures price volatility of programme trading and dynamic hedging strategies, S. Grossman liquidity and market structure, S. Grossman and M. Miller a theory of futures market manipulations, A.S. Kyle.

The Tin Crisis (1985‐86) and Futures Trading

Abstract: A succession of six international tin agreements operated from 1956 to 1985. Futures trading in tin continued in London until the buffer stock scheme, without cash or the support of its sponsoring governments, collapsed in October 1985. The implications of the tin experience for futures trading and for so-called commodity stabilization schemes are examined

Insider Trading in a Globalizing Market: Who Should Regulate What?

Abstract: Trading by an insider on the basis of material non-public corporate information violates the securities laws of the United States and of many, but not all, other countries. As the market for securities becomes increasingly global, the question of whose rules should apply to any particular transaction will arise with increasing frequency. This article addresses that question. Each country's regime concerning insider trading-which transactions, if any, to ban, and how to do so-has largely evolved through consideration of transactions that are entirely domestic in character and impact. In these transactions, the issuer's state of incorporation and principal place of business, the nationality and residence of the insider and of the other party to the transaction, the location of each when placing the order, and the locations of the exchange on which the transaction is effected and of any other exchanges on which the security is listed, have all been of the same country. Globalization, however, means that an increasing number of securities transactions have one or more such dimensions that differ in nationality from the nationality of the other dimensions. Each country associated with such a transnational transaction must decide whether to try to apply its regime to the transaction and whether to resist attempts by other countries to do so. These decisions will have an important impact on behavior in the globalizing securities market, and hence on global economic welfare, because countries' regimes differ in significant ways: in whether or not they ban insider trading and, where they do, in the scope of such ban, the vigor and methods with which they pursue suspected violators, and in the civil and criminal consequences of violating the ban.'

Developments in International Trade and the Trading System

Abstract: Last year marked the third consecutive year of decelerating growth in the volume of world output and trade. The recession in North America and the slowdown of the economic expansion in Western Europe, together with the sharp contraction of output in Central/ Eastern Europe and the former USSR, were the main factors behind the slower growth of world trade. Exports from the Middle East were also affected by the repercussions of the Gulf War (imports into the region, on the other hand, remained relatively buoyant). In contrast, the expansion of trade and output remained very strong in Asia, although signs of slower growth began to appear in the second half. Import growth appears to have been accelerating in Latin America as production growth recovered strongly.

Electronic trading and futures market efficiency

Abstract: This paper analyses the pros and cons of computerized markets for futures contracts. Specifically, it presents the potential of computerized orders matching to resolve unfair trading practices such as inaccurate time and price reporting. front running, dual trading and the possibility of improving futures market efficiency. The political dimension of replacing the open–outcry trading system with electronic trading is considered. The analysis is partially based on experiences with computerized trading systems reported by futures exchanges in the United States, the United Kingdom and Switzerland. Computerized trading around the clock will go a long way towards the globalization of financial markets in the decade of the 1990s, and will improve market efficiency.

The Business One Irwin guide to the futures markets

Abstract: Provides the right combination of basic information and sophisticated strategies to succeed in this exciting and leverage financial environment. Written by experienced traders and brokers, this authoritative guide shows investors and institutional hedgers how to deal successfully in the futures markets. Readers will find: Fundamental analytical techniques so they can react quickly to changes in the market; Strategies for viable speculative trading and for managing risk prudently; State-of-the-art computer trading strategies with tips for developing personal trading system; Special sections on program trading, on dealing with the regulatory agencies, and on commercial hedging.

Share price and trading volume behaviour around trading suspensions

Abstract: This paper examines daily share price and daily trading volume behaviour associated with a sample of trading suspensions on the Amsterdam Stock Exchange. Our results indicate that suspensions are associated with significant price changes, and are neither preceded by any anticipatory price-behaviour, nor followed by significant abnormal returns. These suggest that new information is disclosed during the suspension period, and the nearly complete impact of information release takes place instantaneously. We also observe an increase in trading volume with the occurrence of suspension. This reinforces the evidence of significant information release during trading suspensions on the Amsterdam Stock Exchange. I i " •