Showing papers on "Algorithmic trading published in 1995"
TL;DR: In this article, the authors examined the behavior of institutional traders and provided a detailed account of the anatomy of the trading process, including the number of days needed to fill an order and types of order placement strategies employed.
517 citations
Posted Content•
TL;DR: In this paper, the authors derive the implications from the absence of arbitrage in dynamic securities market with bi-ask spreads, which is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale.
Abstract: We derive the implications from the absence of arbitrage in dynamic securities market with bi-ask spreads. The absence of arbitrage is equivalent to the existence of at least an equivalent probability measure that transforms some process between the bid and the ask price processes of traded securities into a martingale. These martingale measures can be interpreted as possible linear pricing rules and can be used to determine the investment opportunities available in such an economy. The minimum cost at which a contingent claim can be obtained through securities trading is its largest expected value with respect to the martingale measures.
364 citations
Posted Content•
[...]
TL;DR: The authors analyzes the rationale for and profitably of limit order trading in order-driven markets and finds that trading via limit orders is desirable for participants who are willing to risk non-execution and not desirable for others who are not willing to take the risk.
Abstract: The paper analyzes the rationale for and profitably of limit order trading. Although limit orders are essential to the functioning of order driven markets, their use has received relatively little attention in the literature. Trading via limit order is, in fact, sub-optimal when transaction prices change solely in response to new information. We suggest that in an order driven market a paucity of limit orders can result in order imbalances causing the transaction price to move temporarily away and then revert to the true price. Such short term changes in transaction price can offset losses incurred by limit order traders because of permanent changes in transaction price due to information. Further, we suggest that the markets can be in ecological balance with liquidity driven price changes being just sufficient for the flow of market and limit orders to equilibrate. We use transaction data for the Dow Jones Industrial stocks for 1988 to compare a limit order strategy with a market order strategy, and find that limit order returns conditional on non-execution are lower. We also test the profitability of placing a network of buy and sell limit orders, and document the existence of a limit order spread that is appreciably greater than the posted bid-ask spread. Our findings suggest that trading via limit orders is desirable for participants who are willing to risk non-execution, and that trading via market orders is desirable for participants who are not willing to take the risk.
360 citations
Book•
06 Oct 1995
TL;DR: In Neural Networks for Financial Forecasting, traders are provided with a solid foundation that explains how neural nets work, what they can accomplish, and how to construct, use, and apply them for maximum profit.
Abstract: From the Publisher:
When applied to the world of finance, neural networks are automated trading systems, based on mapping inputs and outputs for forecasting probable future values. In Neural Networks for Financial Forecasting - the first book to focus on the role of neural networks specifically in price forecasting - traders are provided with a solid foundation that explains how neural nets work, what they can accomplish, and how to construct, use, and apply them for maximum profit. It is written by an acknowledged authority who is, himself, the developer of several successful networks. Neural Networks for Financial Forecasting enables you to develop a usable, state-of-the-art network from scratch all the way through completion of training. There are spreadsheets and graphs throughout to illustrate key points, and an appendix of valuable information, including neural network software suppliers and related publications.
210 citations
TL;DR: This paper examined the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA) and found that the price and trading volume of newly listed DJIA firms are unaffected.
Abstract: We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S&P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S&P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.
149 citations
TL;DR: In this article, the authors show that mandatory disclosure rules can increase insiders' expected trading profits and that disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset's value.
Abstract: Financial market regulations require various "insiders" to disclose their trades after the trades are made. We show that such mandatory disclosure rules can increase insiders' expected trading profits. This is because disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset's value. We also show that insiders will generally not voluntarily disclose their trades, so for disclosure to be forthcoming, it must be mandatory. Key to the analysis is that the market cannot observe whether an insider is trading on private information regarding asset value or is trading for personal portfolio reasons. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
144 citations
118 citations
Posted Content•
TL;DR: In this paper, a multi-period rational expectations model of stock trading is developed in which investors have differential information concerning the underlying value of the stock. But the model assumes that the information revealed by the market-clearing prices, as well as other public news, is known.
Abstract: This paper develops a multi-period rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock. Investors trade competitively in the stock market based on their private information and the information revealed by the market-clearing prices, as well as other public news. We examine how trading volume is related to the information flow in the market and how investors' trading reveals their private information.
84 citations
72 citations
67 citations
TL;DR: The impact of institutional-and individual-investor-oriented trading systems on the liquidity and volatility of Nasdaq stocks has been the subject of much controversy as mentioned in this paper, and the evidence does not show that individual-oriented systems have been associated with adverse effects on liquidity, even though such effects have been alleged.
Abstract: The impact of institutional- and individual-investor-oriented trading systems on the liquidity and volatility of Nasdaq stocks has been the subject of much controversy. Bid–ask spreads for the most actively traded Nasdaq stocks have increased sharply during the past decade. The widening of spreads is statistically explained by increases in institutional ownership and trading. In contrast, the evidence does not show that individual-oriented trading systems have been associated with adverse effects on liquidity, even though such effects have been alleged.
TL;DR: The authors examined whether information across international markets is rationally incorporated into stock prices and found that Japanese Nikkei index-based futures traded in the U.S. provide complete information about contemporaneous overnight Japanese returns.
TL;DR: Oslen et al. as mentioned in this paper developed a set of real-time intra-day trading models for the German mark against US$ and used them to give explicit trading recommendations under reali...
Abstract: The foreign exchange (FX) market is worldwide, but the dealers differ in their geographical locations (time zones), working hours, time horizons, home currencies, access to information,transaction costs, and other institutional constraints. The variety of time horizones is large: from intra-day dealers, who close their positions every evening, to long-term investors and central banks. Depending on the constraints, the different market participats need different strategies to reach their goal, which is usually maximizing the profit, or rather a utility function including risk. Different intra-day trading strategies can be studied only if high-density data are available. Oslen & Associates (O & A) has collected and analysed large amounts of FX quotes by market makers around the clock (up to 5000 non-equally spaced prices per day for the German mark against US$). Based on these data, a set of real-time intra-day trading models has been developed. These models give explicit trading recommendations under reali...
TL;DR: In this paper, the authors show that dual trading reduces the net order flow and market depth of informed traders, while the utility of uninformed traders increases with dual trading while the net profits decrease.
TL;DR: In this article, the authors studied the return reversals of exchange traded real estate securities using an arbitrage portfolio approach and found that there exist significant return reversal in such securities if trading costs can be ignored.
Abstract: This paper studies the return reversals of exchange traded real estate securities using an arbitrage portfolio approach. Using the approach, we find that there exist significant return reversals in such securities. These return reversals could be exploited by arbitrage traders if trading costs can be ignored. However, the arbitrage profits disappear after deducting trading costs and taking into account the implicit cost of bid-ask spread. Thus, the real estate securities market is efficient at weekly intervals in the sense that one could not exploit the price reversals via some simple trading rules.
TL;DR: In this paper, a self-enforcing agreement between broker-dealers and long-lived clients is proposed to support short-term trading losses in adverse selection models of security market microstructure.
Abstract: In adverse-selection models of security market microstructure, a market maker could enhance efficiency if he or she were willing to sustain short-term trading losses We show that this desirable activity can be supported as a self-enforcing agreement between broker-dealers and long-lived clients An implication is that brokers who sustain such losses should charge higher fees to long-term clients for trades where the broker merely receives a commission This prediction is supported by an analysis of brokerage rates on the Australian Stock Exchange By contrast, market makers who make trading profits charge lower agency fees to large, long-term clients Copyright 1995 by University of Chicago Press
TL;DR: Investors' confusion between market gains and trading gains helps explain why they continue trading even though it rarely improves their performance as discussed by the authors, and the key to the fallacy in their reasoning is the market maker who must impose a spread in order to survive.
Abstract: Investors' confusion between market gains and trading gains helps explain why they continue trading even though it rarely improves their performance. Then, too, some investors reason that if trading based on random selection is as likely to prove profitable as not, trading based on any information whatever will result in performance better than neutral. The key to the fallacy in their reasoning is the market maker, who must impose a spread in order to survive.
Posted Content•
Posted Content•
TL;DR: This article proposes a taxonomy of design alternatives based on 6 major dimensions: market structure, type of orders, order execution priority rules, price discovery rules, time stamping, and transparency, which could have an impact on the eventual attractiveness of the market to the investors.
Abstract: Modern financial markets compete aggressively for trading activity and investor interest.Information technology, once a crucial element in streamlining paper flows andoperations, is now a strategic resource used in attracting or retaining market liquidity.Established exchanges introduce technology to enhance their markets. New marketvenues challenge the status quo and rely on technology to offer diverse services toincreasingly sophisticated investors. In this paper, we examine the strategic designdecisions embedded in these new electronic trading systems. Design decisions arecritical, as they determine the market microstructure which influences investingstrategies, patterns of trade, liquidity and volatility. We propose a taxonomy of designalternatives based on six major dimensions: market structure, type of orders, orderexecution priority rules, price discovery rules, time stamping, and transparency. Usingexamples of existing systems, we discuss the potential impact of the various alternativeson the eventual attractiveness of the market to the investors.
TL;DR: The fundamental theorem of asset pricing is proved that links the lack of arbitrage opportunities to the existence of a risk-neutral probability measure and the question of optimal portfolio choice in a complete or incomplete market is described, with or without transactions costs.
Abstract: Publisher Summary A fundamental characteristic of security prices in a competitive securities market is that they do not permit arbitrage opportunities. The number of states in the economy is assumed in the chapter to be finite. This allows for a simple and elegant characterization of arbitrage-free security prices. An analysis of related topics to the theory of arbitrage is presented in the chapter. First, it is analyzed how one can characterize arbitrage-free prices in a frictionless securities market. To this end, the fundamental theorem of asset pricing is proved that links the lack of arbitrage opportunities to the existence of a risk-neutral probability measure. The issue of dynamic completeness is also acknowledged. Second, it is analyzed how to characterize arbitrage-free asset prices in a market where there are costs of trading securities. It is shown how the fundamental theorem of asset pricing needs to be generalized to take account of market frictions. The question of optimal portfolio choice in a complete or incomplete market is also described, with or without transactions costs. The focus is on the optimal portfolio choice behavior of an individual investor who takes as given an arbitrage-free process for asset prices.
TL;DR: In this article, Schrader conducted an empirical study of informal information trading in the German and US steel industries which showed that managers tend to follow these rules, however, they appear to be more efficient information traders than their German counterparts.
Book•
20 Apr 1995
TL;DR: In this paper, the authors investigated the unique trading mechanism of the Korea Stock Exchange and its intraday behavior of stock price volatility and found that information arrival and trading activities are the main sources of volatility.
Abstract: Along the lines of Amihud and Mendelson (1987a, 1989,1991), this study investigates the unique trading mechanism of the Korea Stock Exchange (KSE) and its intraday behavior of stock price volatility. The evidence from this study indicates that the introduction of an additional clearing procedure at the afternoon closing makes price discovery process more efficient than before from the viewpoint of stock price volatility. Hence, such trading mechanisms can be applied to emerging stock markets as well as developed stock markets. In addition, based on intraday analysis, stock price volatilities appear to occur mainly during the trading period, not during the lunch break or overnight period. Consequently, the results confirm the previous studies that information arrival and trading activities are the main sources of volatility.
01 May 1995
TL;DR: Tasks conducted in futures pit trading and current off-hours electronic trading systems are described, which include visualization of the market and its participants, a trading process which allows active participation and price discovery as well as concurrent interaction among each of the participants.
Abstract: The primary concern in designing an interface for an electronic trading system is the impact on market liquidity [9]. Current systems make use of efficient order-execution algorithms but fail to capture elements of the trading floor that contribute to an efficient market [9]. We briefly describe tasks conducted in futures pit trading and current off-hours electronic trading systems. Understanding the tasks helps define key components to an interface for electronic trading. These include visualization of the market and its participants, a trading process which allows active participation and price discovery as well as concurrent interaction among each of the participants.
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 competition from an alternative trading venue has mixed effects on the trading costs borne by investors.
Abstract: Electronic financial markets use information technology to disseminate prices, quantities, and buyer and supplier identities. Increased visibility and market transparency have recognized benefits, but may introduce imperfections, and create profitable opportunities to “bypass”; established exchanges. In the U.S., dissemination of real‐time securities market information has equipped several firms to develop competing, off‐exchange trading mechanisms that rely on central market price data, but whose transactions bypass the established market. Significant trading away from the principal market may reduce market quality and increase transactions costs. A simulation model of trading in a continuous auction market (similar to the market structure of the New York Stock Exchange) is used to examine the effects of increasing levels of trading activity through an off‐exchange dealer. The results indicate competition from an alternative trading venue has mixed effects on the trading costs borne by investors—raising ...
01 Feb 1995
Abstract: Applying S. Taylor's approach (1986), we make an extensive analysis on the Japanese stock market, foreign exchange market and the Japanese Government Bond Futures market. The purpose of this paper is to empirically reveal the structure of the Japanese markets via Taylor's model rather than to propose a new model. For this reason, we include a variety of analyzed data particularly for the Japanese stock market and the foreign exchange market because the results can be used in a different manner. The paper consists of three parts. But each part can be read separately.
TL;DR: In this article, the authors show that corporate insiders earn abnormal returns by adjusting their own firm's stock trading to future market movements, consistent with the view that those markets are followed by improved economic conditions.
Abstract: This paper show that corporate insiders earn abnormal returns by adjusting their own firm's stock trading to future market movements. Insider trading activity in bear markets is characterized by decreases in insider sales and increases in purchases, consistent with the view that those markets are followed by improved economic conditions. Conversely, insider sales increase and purchases decrease in bull markets, consistent with the view that inferior market conditions tend to follow those periods.
27 Nov 1995
TL;DR: A model system and strategy for developing decision support systems to trade financial markets and forecast asset price movements is presented and discussed and examples demonstrate the forecasting output and performance of the models as measured by profit and loss returns.
Abstract: This paper is based on research applying artificial intelligence to problems of trading financial markets The paper presents a background to various financial market trading problems of interest A model system and strategy for developing decision support systems to trade financial markets and forecast asset price movements is then presented and discussed The problems of interest are those where the variables are not constant in time The time series of data representing the dynamics of price movements in financial markets are nonlinear and nonstationary The forecasting techniques developed are applied to examples of foreign exchange trading involving the directional movement only of the four major currencies of British pound sterling, Deutschemark, Swiss franc and Japanese yen against the US dollar Examples demonstrate the forecasting output and performance of the models as measured by profit and loss returns