Showing papers on "Algorithmic trading published in 1993"
TL;DR: In this paper, the authors examined patterns in stock market trading volume, trading costs, and return volatility using New York Stock Exchange data from 1988 and found that trading volume is low and adverse selection costs are high on Monday, consistent with the predictions of Foster and Viswanathan (1990) model.
Abstract: Patterns in stock market trading volume, trading costs, and return volatility are examined using New York Stock Exchange data from 1988. Intraday test results indicate that, for actively traded firms trading volume, adverse selection costs, and return volatility are higher in the first half-hour of the day. This evidence is inconsistent with the Admati and Pfleiderer (1988) model which predicts that trading costs are low when volume and return volatility are high. Interday test results show that, for actively traded firms, trading volume is low and adverse selection costs are high on Monday, which is consistent with the predictions of the Foster and Viswanathan (1990) model. ACADEMICS, INVESTORS, AND REGULATORS alike are now intensively focused upon understanding the volatility of asset returns and its relation to trading volume. This interest was undoubtedly piqued by the market break of October 1987-a time during which volatility and trading volume reached unprecedented levels. But, even beforehand, researchers observed regular differences in the return process for various hours of the day and days of the week. Research concerning temporal patterns in stock market volatility and volume falls in two groups-studies that document observed patterns and studies that develop models to predict patterns. Among the studies in the first group are Oldfield and Rogalski (1980), French and Roll (1986), Stoll and Whaley (1990), Harris (1986), and Wood, McInish, and Ord (1985), who report evidence on seasonalities in daily and weekly return variances. Among the regularities that have been documented using interday data is that volatility is higher when the market is open than when it is closed. Oldfield and Rogalski (1980), French and Roll (1986), and Stoll and Whaley (1990), for example, point out significant differences in return volatility between trading
718 citations
TL;DR: In this article, it was shown that the variance of prices and expected trading volume depend on the public information released at the start of trading, and that trading volume is autocorrelated.
Abstract: In a one-period model of market making with many exogenously informed traders, we first show that the variance of prices and expected.trading volume depend on the public information released at the start of trading. This is accomplished by representing beliefs with elliptically countoured distributions, for which the form of optimal decision rules does not depend on the specific distribution used. Second, if the model is altered so that the decision to become informed is made endogenous, then the decision rules of the market-maker and infomed traders depend on the public information. Third, in a multiperiod model with many informed traders and long-lived private information, recursion formulas similar to those of Kyle (1985) hold for all elliptically contoured distributions, trading volume is autocorrelated, and, unless per period liquidity trading is bounded.away from zero as new trading periods are added, informed traders' profits vanish. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
277 citations
TL;DR: In this article, the authors used the market for bets in a horse race in which bookmakers set prices as the vehicle for such an investigation, and the market spread was obtained as a function of the incidence of insider trading and other parameters.
Abstract: Even in competitive financial markets, the presence of insider traders leads to a divergence between the selling and buying price, as intermediaries attempt to recoup their losses to the insiders by extracting a margin from other traders. The extent of this divergence is an indication of the severity of the market distortion due to insider trading. Conversely, the incidence of insider trading may be inferred from observed spreads given an appropriate model of trading. In this paper, the market for bets in a horse race in which bookmakers set prices serves as the vehicle for such an investigation. By solving for the equilibrium prices in a game in which bookmakers compete in prices, the market spread is obtained as a function of the incidence of insider trading and other parameters. this incidence is then estimated from U.K. data. Copyright 1993 by Royal Economic Society.
208 citations
TL;DR: This article examined the cross-sectional distribution of bid-ask spreads in the S&P 100 index options market and found that traders view call and put options as substitutes, and vice versa.
Abstract: This paper examines the cross-sectional distribution of bid-ask spreads in the S&P 100 index options market. Cross-sectional differences in bid-ask spreads are found to be directly related to differences in market-making costs and trading activity across options. We also examine the relation of an option's bid-ask spread and trading activity to the spread and trading activity in other options. Call option trading activity is inversely related to the call option bid-ask spread but positively related to the spread of the put option having the same strike price and maturity, and vice versa. These findings suggest that traders view call and put options as substitutes.
181 citations
TL;DR: This article investigates statistical properties of technical analysis in order to determine if there is any objective basis to the popularity of its methods.
Abstract: The attention that technical analysis receives from financial markets is somewhat of a puzzle. According to Wiener-Kolmogorov prediction theory, time-varying vector autoregressions (VARs) should yield best forecasts of a stochastic process in the mean square error (MSE) sense. Yet, quasitotality of traders use technical analysis in day to day forecasting although it bears no direct relationship to WienerKolmogorov prediction theory. In fact, technical analysis is a broad class of prediction rules with unknown statistical properties, developed by practitioners without reference to any formalism. This article investigates statistical properties of technical analysis in order to determine if there is any objective basis to the popularity of its methods. Broadly, there are two issues of interest. First, can one devise formal algorithms that can generate buy and sell signals identical to the ones given by technical analysis-that is, are any of these rules (mathematically) well defined? The second issue is to what extent well-defined rules of technical analysis are useful in prediction over and above the forecasts generated by Wiener-Kolmogorov prediction theory.
55 citations
TL;DR: In this article, the authors examined intraday temporal relationships among arbitrage spreads, cash and futures price volatility, and cash trading volume, using transactions data for the Major Market Index futures contracts and the component stocks of the index.
Abstract: This paper examines intraday temporal relationships among arbitrage spreads, cash and futures price volatility, and cash trading volume, using transactions data for the Major Market Index futures contracts and the component stocks of the index. Results indicate that changes in the spread have a significant impact on cash and futures price volatility as well as on cash trading volume. The impact of the spread, however, is attenuated by the short-sale restriction in the cash market. Contrary to popular beliefs, a more volatile market leads to subsequent decreases in the spread, probably because of increases in the supply of arbitrage services or faster price adjustments.
53 citations
Book•
08 Mar 1993
TL;DR: In this paper, the authors present a chart-based analysis of the last frontier of the stock market based on AA's Trading Lessons from AA and a three-stage trading system.
Abstract: Partial table of contents: Trading----The Last Frontier. The Odds Against You. INDIVIDUAL PSYCHOLOGY. Fantasy Versus Reality. Self--Destructiveness. Trading Lessons from AA. Winners and Losers. MASS PSYCHOLOGY. What Is the Market?. The Market Crowd and You. Managing Versus Forecasting. CLASSICAL CHART ANALYSIS. Support and Resistance. Trendlines. Chart Patterns. COMPUTERIZED TECHNICAL ANALYSIS. Moving Averages. The Directional System. Williams %R. Relative Strength Index. THE NEGLECTED ESSENTIALS. Volume--Based Indicators. Herrick Payoff Index. STOCK MARKET INDICATORS. New High--New Low Index. PSYCHOLOGICAL INDICATORS. Consensus Indicators. NEW INDICATORS. Elder--Ray. TRADING SYSTEMS. Triple Screen Trading System. Channel Trading Systems. RISK MANAGEMENT. Money Management. Afterword. Sources. Index.
51 citations
TL;DR: This paper examined the extent to which futures contributed to the stock market crash and found that futures explained little of the behavior of the markets, leaving breakdown as the most probable explanation for the crash.
Abstract: The authors examine the extent to which futures contributed to the stock market crash. Correcting for nonsynchronous trading, they find that this explained little of the behavior of the markets, leaving breakdown as the most probable explanation. The authors investigate breakdown by analyzing the pricing relationship on the 19th and 20th of October 1987. They find that the arbitrage link broke on the 19th due to liquidity problems in the stock market. This drove traders to the futures market, alleviating the liquidity problem such that the link was restored on the 20th. The implication is that the problem lay with the stock market. Copyright 1993 by Royal Economic Society.
45 citations
TL;DR: In this paper, the authors construct a dynamic competitive model where price volatility comes from both information arrival and noise trading, and show that in the absence of noise trading there exists a fully revealing equilibrium, thus extending a well-known result to a multi-period setting.
44 citations
Posted Content•
TL;DR: In this article, the authors present an analysis of daily stock price volatility on the London Stock Exchange for the period 1980-93 and find that rather than increasing volatility, index futures contracts are found to have reduced volatility significantly by around 17%.
Abstract: The stock market crash of October 1987 and the growing importance of index arbitrage and portfolio insurance helped to focus the attention of academics, practitioners and regulators on the possibly destabilising role of equity index futures on the underlying cash market. Although theoretical evidence on this question is somewhat ambiguous, empirical evidence, relating particularly to US markets, has been less equivocal: typically, no significant effect of futures trading has been found. This paper presents an analysis of daily stock price volatility on the London Stock Exchange for the period 1980-93. The measure of volatility produced is appropriate, given the distribution of returns and the time-varying nature of stock price volatility, and changes in monetary policy regime. The impact of futures on stock price volatility is measured within an augmented ARCH framework and the principal result is striking: rather than increasing volatility, index futures contracts are found to have reduced volatility significantly by around 17%.
38 citations
Book•
08 Mar 1993
TL;DR: In this paper, the authors present a chart-based analysis of the last frontier of the stock market based on AA's Trading Lessons from AA and a three-stage trading system.
Abstract: Partial table of contents: Trading----The Last Frontier. The Odds Against You. INDIVIDUAL PSYCHOLOGY. Fantasy Versus Reality. Self--Destructiveness. Trading Lessons from AA. Winners and Losers. MASS PSYCHOLOGY. What Is the Market?. The Market Crowd and You. Managing Versus Forecasting. CLASSICAL CHART ANALYSIS. Support and Resistance. Trendlines. Chart Patterns. COMPUTERIZED TECHNICAL ANALYSIS. Moving Averages. The Directional System. Williams %R. Relative Strength Index. THE NEGLECTED ESSENTIALS. Volume--Based Indicators. Herrick Payoff Index. STOCK MARKET INDICATORS. New High--New Low Index. PSYCHOLOGICAL INDICATORS. Consensus Indicators. NEW INDICATORS. Elder--Ray. TRADING SYSTEMS. Triple Screen Trading System. Channel Trading Systems. RISK MANAGEMENT. Money Management. Afterword. Sources. Index.
TL;DR: In this paper, the authors investigated the relationship between independent auditor selection and trading activities and found that on the first trading day, the trading volume was significantly larger for corporations audited by a Big Eight CPA firm than for non-big eight CPA firms.
TL;DR: In this paper, the authors used transactions data from the London Stock Exchange to characterize the intraday pattern of security prices and trading volume for securities trading on SEAQ, focusing on a sample of U.K. firms that are cross-listed on the NYSE.
Abstract: This paper uses transactions data from the London Stock Exchange to characterize the intraday pattern of security prices and trading volume for securities trading on SEAQ. It focuses in more detail on a sample of U.K. firms that are cross-listed on the NYSE. Using additional data from the NYSE-AMEX (I5SM), we compare volatility, volume, and quotes as trading starts in London and then continues in New York. These firms have substantially longer trading hours than most singly-listed stocks, and are also traded in two markets with very different institutional setups. This is shown to have several important implications for theories on intraday behavior of prices, the organization of exchanges, and the general consequences of round-the-clock trading.
TL;DR: The paper describes a system which was developed in Australia for the particular conditions that exist in the livestock sector of that country, known as CALM, and suggests that weaknesses derive from the predominantly competition-oriented approach of contemporary theory.
Abstract: On-line trading is the buying and selling of goods or services through an interactive telecommunications-based computer network. The paper describes a system which was developed in Australia for the particular conditions that exist in the livestock sector of that country. Known as CALM, the system is claimed by its owners to be the first in the world to offer a national information technology-based livestock trading scheme. The strategic intentions of calm's owners and sponsors are assessed from the perspectives of the market operator and the industry participants, and some cautious generalizations made concerning on-line trading systems generally. Weaknesses in the explanatory power of strategic information systems theory are identified, and the suggestion made that these weaknesses derive from the predominantly competition-oriented approach of contemporary theory.
TL;DR: In this paper, the authors examined the pricing of stock index futures contracts on the new Finnish market and found that there is no institutional framework for short selling of stocks, which has been suggested to be the most important reason for underpricing futures contracts.
TL;DR: In this article, the authors examined the price behaviour, trading volume and liquidity of stocks in the Canadian market at the time of options listing and found no evidence to indicate that either daily return volatility or trading volume is affected by the listing.
Abstract: This study examines the price behaviour, trading volume and liquidity of stocks in the Canadian market at the time of options listing. Unlike some studies examining similar effects in the United States, the present one finds no evidence to indicate that either daily return volatility or trading volume is affected by the listing. Similarly, liquidity, as measured by the bid-ask spread, is unaffected. At the same time, cross-sectional tests indicate an inverse relationship between before-to-after trading volume and the before-to-after bid-ask spread.
01 Jan 1993
Book•
01 Oct 1993
TL;DR: The New York Stock Exchange lost its near monopoly on the securities market largely, the authors suggest, through its own shortsightedness as discussed by the authors, which made it less attractive to investors.
Abstract: New kinds of trading in stock indexes, futures and options, and new markets threaten to make the New York Stock Exchange obsolete. Drawing upon access to the Exchange's archives, as well as on academic reasearch, this book explains how the Exchange lost its near monopoly on the securities market largely, the authors suggest, through its own shortsightedness. It shows how the Exchange misjudged the factors, such as the growth of institutional investing and computerized trading, that made it less attractive to investors. The result is a cautionary tale of how Wall Street sacrificed long-term growth for short-term profits.
Book•
31 Aug 1993
TL;DR: In this paper, the authors present an overview of insider trading, including the Law of Insider Trading, the role of the SEC, and public policy towards insider trading and a Proposal for Decriminalization.
Abstract: Markets, Firms and Publicly Held Corporations. Securities Regulations, Market Efficiency, and the Role of the SEC. The Law of Insider Trading. The Empirical Literature on Insider Trading - an Overview. Insiders and Outsiders - an Empirical Analysis of Price and Volume Runups Preceding Tender Offer Announcements. Public Policy towards Insider Trading - a Proposal for Decriminalization.
TL;DR: In this article, the impact of the Export Trading Company Acy of 1982 is discussed and the characteristics of export trading companies are compared with those of general trading companies, and suggestions for further development of exporting trading companies and for government policies are proposed.
Abstract: This paper reviews the impact of the Export Trading Company Acy of 1982. The ramifications of the Act are discussed and the characteristics of export trading companies are compared with those of general trading companies. The responses of medium- and small-sized firms, export management companies, and banks to the Act are analyzed. In light of the unenthusiastic responses from different parties, suggestions for further development of exporting trading companies and for government policies are proposed.
Patent•
09 Jun 1993
TL;DR: In this article, a data processing system receives a continuous stream of real-time transactional data regarding market transactions of fixed income securities and uses linear interpolation techniques to complete an operative data set.
Abstract: A data processing system receives a continuous stream of real time transactional data regarding market transactions of fixed income securities. The incoming data is qualified and then used to determine the term structure of interest rates based on price information. The system provides linear interpolation techniques to complete an operative data set. This set is updated with current trade data, with term structure shifting using pivot points from newly qualified data. An index value for a pre-select portfolio of securities is then calculated and expressed in terms of price relative to par, yield to maturity and duration. In a specific implementation using U.S. Treasuries as the monitored security, the index value supports an automated trading function for futures and/or options contracts based on the change in value of the index. The index provides a more accurate barometer of market changes and a more useful tool in measuring portfolio management for plan sponsors.
TL;DR: This paper examined trading in call and put options around quarterly earnings announcements and investigated whether the existence of these options affects the common stock trading volume response to these announcements, finding that the options trading volume reaction to earnings announcements is larger than the corresponding reaction in common stock.
Abstract: This study examines trading in call and put options around quarterly earnings announcements and investigates whether the existence of these options affects the common stock trading volume response to these announcements. We find that the options trading volume reaction to earnings announcements is larger than the corresponding reaction in common stock. Consistent with the idea that options provide an alternative vehicle for trading on information, the existence of these options lowers the level of trading in common stock. Options also appear to offer investors an alternative method of taking short positions, as shown by the symmetric stock market trading volume reaction to good versus bad news for firms with listed options. In contrast, firms without listed options exhibit a larger trading volume response to good news than to bad news of similar magnitude.
Book•
01 May 1993
TL;DR: Starting Out in Futures Trading as mentioned in this paper introduces the basics of futures trading, including how to send an order to the floor; how to develop a trading plan with disciplined risk management techniques; trading exercises that simulate real trading; options and fundamental and technical analysis.
Abstract: The fifth edition thoroughly introduces the beginner to futures trading in a clear, concise manner. Futures expert Mark Powers combines both theory and real-world examples, making this the ideal book for practitioners who need to brush up on the essential skills or for those who just want to know what futures trading is all about. In addition to the market basics, Starting Out in Futures Trading covers: How to send an order to the floor; How to develop a trading plan with disciplined risk management techniques; Trading exercises that simulate real trading; Options and fundamental and technical analysis. Contract specifications.
Journal Article•
Posted Content•
TL;DR: A simulation model of trading in a continuous auction market is used to examine the effects of increasing levels of trading activity through an off-exchange dealer, and results indicate that competition from an alternative trading venue reduces some trading costs borne by some investors.
Abstract: Electronic markets use information technology to disseminate information onprices, quantities, and buyer and supplier identities. In spite of the recognizedbenefits of electronic markets, increased visibility and transparency may introduceimperfections, and create profitable opportunities to bypass markets that generatesthe information. In the U.S. securities markets, dissemination of market data hasequipped several firms to develop competing, off-exchange trading mechanismsthat rely on market price data, but whose transactions bypass the establishedmarket. Concern is rising that the growing volume of trading occurring awayfrom the main market may reduce liquidity, and increase transactions costs. Asimulation model of securities trading in a continuous auction market (similar tothe market structure of the New York Stock Exchange) is used to examine themarket quality effects of increasing levels of trading activity through an off-exchangedealer. Market characteristics, such as transactions costs, are measuredas off-exchange trading increases from zero percent to 20 percent of the totaltrading volume. The results indicate that competition from an alternative tradingvenue reduces some trading costs borne by investors. Contrary to regulatorygoals, however, off-market trading expands the role of profit-seeking dealers, andlowers the probability that some investors' orders will execute.
24 Nov 1993
TL;DR: Reports hypothetical trading results of a New York Stock Exchange (NYSE) listed stock over a period of two years using an artificial neural network (ANN) based financial trading system.
Abstract: Reports hypothetical trading results of a New York Stock Exchange (NYSE) listed stock over a period of two years using an artificial neural network (ANN) based financial trading system. The system was designed, constructed and tested for its ability to predict stock prices and more importantly increase trading profit. This system is still at a preliminary stage and many of the parameters effect on the ANN have not been fully explored yet. However, this simple system has provided insight into the design of a successful ANN-based financial trading system, as the results have been quite encouraging. >
09 Jun 1993
TL;DR: The behavior of the market is analyzed as a function of the proportions of traders in the two categories, showing that increasing heterogeneity positively affects the market volume, without visibly increasing the volatility of prices.
Abstract: we present an application of neural networks to financial markets, experimenting with various learning mechanisms that may describe reasonable behavioral rules followed by agents acting under incomplete information about the environment. Each agent is described by a neural network who decides the price she is willing to pay for an asset, and the quantity she wants to buy or sell. Agents differ as to a number of dimensions, and in particular the trading strategy that may be used to divide the traders in two different categories. The interactions among the different agents determine every day the market price and the volume of transactions. We analyze the behavior of the market as a function of the proportions of traders in the two categories, showing that increasing heterogeneity positively affects the market volume, without visibly increasing the volatility of prices. We also experiment with different learning mechanisms, that can be interpreted in economic terms as forcing on the agents differing degrees of risk aversion.
TL;DR: In this article, the authors examined the effect of no afternoon trading on Hong Kong stock market and found that the effect was consistent with the private information, but not with the public information or trading noise hypothesis.
Abstract: The Hong Kong stock market had about five years of no afternoon trading session on Wednesday in the 1980’s. This paper makes use of this special feature in testing among public information, private information and trading noise hypothesis. We examine the effect on interday volatility, intraday volatility and the trading volume when there is no afternoon trading on Wednesday. The results indicate that the interday and intraday volatility as well as the trading volume decrease on Wednesday but increase on Thursday. The evidence is therefore consistent with the private information, but not with the public information or trading noise hypothesis.
TL;DR: In this paper, the authors extend the empirical testing of trading volume theory to include a relatively small but highly volatile stock market with a reputation as a haven for speculators trading on rumors and find that the fraction of a firm's shares traded is positively related to the dispersion of financial analysts' earnings forecasts.
Abstract: The results of this study provide additional support for the trading volume theory that suggests that investor disagreement over the interpretation of information leads to increased trading. Based upon a sample of Hong Kong firms, the study is unique in terms of extending the empirical testing of trading volume theory to include a relatively small but highly volatile stock market with a reputation as a haven for speculators trading on rumors. The fraction of a firm's shares traded is found to be positively related to the dispersion of financial analysts' earnings forecasts. The finding suggests that the model in Ajinkya et al. (1991) [The Accounting Review 66, 389–401] is robust as applied in an Asia-Pacific market and that there is a rational element to the Hong Kong market as well.