Showing papers on "Algorithmic trading published in 2000"
TL;DR: In this paper, seven distinct measures of trading friction are computed from transactions data for 1,706 NYSE/AMSE stocks and 2,184 Nasdaq stocks, and the degree to which the various measures are associated with each other and with trading characteristics of stocks is examined.
Abstract: The sources of trading friction are studied, and simple, robust empirical measures of friction are provided. Seven distinct measures of trading friction are computed from transactions data for 1,706 NYSE/AMSE stocks and 2,184 Nasdaq stocks. The measures provide insights into the magnitude of trading costs, the importance of informational versus real frictions, and the role of market structure. The degree to which the various measures are associated with each other and with trading characteristics of stocks is examined.
601 citations
TL;DR: A detailed review of the theoretical, empirical and experimental literature on market microstructure with a special focus on informational issues relating to: (1) Price formation and price discovery, including both static issues such as the determinants of trading costs and dynamic issues such the process by which prices come to impound information over time, including the relation between price formation and trading protocols, especially the topic of market transparency as mentioned in this paper.
Abstract: Market microstructure is the area of finance that studies the process by which investors' latent demands are ultimately translated into prices and volumes. This paper provides a detailed review of the theoretical, empirical and experimental literature on market microstructure with a special focus on informational issues relating to: (1) Price formation and price discovery, including both static issues such as the determinants of trading costs and dynamic issues such the process by which prices come to impound information over time, (2) Market structure and design, including the relation between price formation and trading protocols, (3) Information and disclosure, especially the topic of market transparency, i.e., the ability of market participants to observe information about the trading process, and (4) Interface of market microstructure with other areas of finance including asset pricing, international finance, and corporate finance. I discuss the implications of recent research for investors, policy makers, and regulators, and identify some directions for future research.
389 citations
TL;DR: In this paper, the authors examined the impediments to arbitrage in 82 situations between 1985 and 2000, where the market value of a company is less than the sum of its publicly traded parts.
Abstract: This paper examines the impediments to arbitrage in 82 situations between 1985 and 2000, where the market value of a company is less than the sum of its publicly traded parts. These situations suggest clear arbitrage opportunities and provide an ideal setting in which to study the risks and market frictions that prevent arbitrageurs from immediately forcing prices to fundamental values. We find that 30% of the situations terminate without converging. Furthermore, because of forced liquidation to satisfy capital requirements, we estimate that the returns to a specialized arbitrageur would be 50% larger if the path to convergence was smooth rather than as observed. Uncertainty about the distribution of returns and characteristics of the risks appear to be an important obstacle.
338 citations
TL;DR: In this paper, the authors studied the spread, depths and trading activity for US equities over an extended time sample and found that daily changes in market averages of liquidity and trading activities are highly volatile, negatively serially correlated and influenced by a variety of factors.
Abstract: Spreads, depths and trading activity for US equities are studied over an extended time sample. Daily changes in market averages of liquidity and trading activity are highly volatile, negatively serially correlated and influenced by a variety of factors. Liquidity plummets significantly in down markets but increases weakly in up markets. Trading activity increases in either up or down markets. Recent market volatility induces less trading activity and reduces spreads. There are strong day-of-the-week effects; Fridays are relatively sluggish while Tuesdays are active. Long and short term interest rates influence liquidity and trading activity. Depth and trading activity increase just prior to major macroeconomic announcements.
325 citations
Posted Content•
TL;DR: A study of the 103 countries that have stock markets reveals that insider trading laws exist in 87 of them, but enforcement -as evidenced by prosecutions -has taken place in only 38 of them as discussed by the authors.
Abstract: The existence and the enforcement of insider trading laws in stock markets is a phenomenon of the 1990s. A study of the 103 countries that have stock markets reveals that insider trading laws exist in 87 of them, but enforcement - as evidenced by prosecutions - has taken place in only 38 of them. Before 1990, the respective numbers were 34 and 9. Does this matter? We find that the cost of equity in a country, after controlling for a number of other variables, does not change after the introduction of insider trading laws, but decreases significantly after the first prosecution.
250 citations
TL;DR: In this paper, the authors investigated the profitability of a simple technical trading rule based on Artificial Neural Networks (ANNs) and showed that in absence of trading costs, the technical rule is always superior to a buy-and-hold strategy for both ''bear'' market and ''stable'' market episodes.
236 citations
TL;DR: Hong et al. as discussed by the authors studied how market closures affect investors' trading policies and the resulting return-generating process and showed that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings.
Abstract: This paper studies how market closures affect investors' trading policies and the resulting return-generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U-shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open-to-open returns than close-to-close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs. WE MODEL A COMPETITIVE STOCK MARKET with periodic closures in which investors trade for both allocational and informational reasons. We use the model to study how market closures intrinsically affect investors' trading behavior and the return-generating process. The purpose of this analysis is to increase our understanding of the time variation in security trading and returns that are associated with regular market closures, such as the intraday and intraweek patterns in stock returns, volatility, and trading volume. We consider a stock market in which the exogenous information flow is homogeneous over time and the market closes periodically. When the market is open, investors trade the stock either to rebalance their overall portfolio of assets, which also includes other illiquid assets, or to speculate on future stock payoffs using their private information. In particular, investors adjust their asset portfolio by trading the stock in order to hedge the risk of illiquid assets. We refer to these trades as hedging trades and those motivated by private information as speculative trades. When the market is closed, " Hong is from the Graduate School of Business, Stanford University, and Wang is from the Sloan School of Management, Massachusetts Institute of Technology, and NBER. The authors thank Jennifer Huang for programming assistance and an anonymous referee for many valuable suggestions. They also thank Glenn Ellison, John Heaton, Craig Holden, Andrew Lo, Steve Slezak, Jeremy Stein, Rene Stulz (the editor), the NBER Asset Pricing Lunch Group, and par
187 citations
TL;DR: In this paper, a genetic programming-based trading strategy was proposed to predict stock prices based on predictions of stock prices using genetic programming (or GP), and a metric quantifying the probability that a specific time series is GP-predictable is presented.
Abstract: Based on predictions of stock-prices using genetic programming (or GP), a possibly profitable trading strategy is proposed. A metric quantifying the probability that a specific time series is GP-predictable is presented first. It is used to show that stock prices are predictable. GP then evolves regression models that produce reasonable one-day-ahead forecasts only. This limited ability led to the development of a single day-trading strategy (SDTS) in which trading decisions are based on GP-forecasts of daily highest and lowest stock prices. SDTS executed for fifty consecutive trading days of six stocks yielded relatively high returns on investment.
185 citations
TL;DR: The modification of the stochastic process of the underlying asset that follows from the presence of dynamic trading strategies is derived and the nonlinear effects and the feedback from prices to trading strategy are analyzed.
Abstract: This paper analyzes the influence of dynamic trading strategies on the prices in financial markets. After a thorough discussion of the modeling issues involved we derive the modification of the stochastic process of the underlying asset that follows from the presence of dynamic trading strategies. We analyze the nonlinear effects and the feedback from prices to trading strategy. The pricing, hedging, and replication of options in the context of illiquid markets is discussed and a nonlinear partial differential equation for an option replication strategy is derived. Finally the effects of one of the most popular trading strategies---Put-option replication---on the price of the underlying asset are illustrated using numerical simulations.
160 citations
TL;DR: In this paper, the authors analyzed the effects of insider trading regulation on a sample of 5,099 acquisitions in 56 different countries and estimated the profits due to insider trading from the abnormal volume in the weeks prior to the announcement, under the assumption that insiders purchase those shares at the prevailing price and hold them until the public announcement.
Abstract: By calculating an estimated measure of undetected insider trading, this paper shows that profits made by informed corporate insiders prior to tender offer announcements increase after the first enforcement of insider trading laws. I analyze the effects of Insider Trading regulation on a sample of 5,099 acquisitions in 56 different countries, and estimate the profits due to insider trading from the abnormal volume in the weeks prior to the announcement, under the assumption that insiders purchase those shares at the prevailing price and hold them until the public announcement. I find that laws that prosecute insider trading fail to eliminate profits made by insiders, and make acquisitions more expensive. Therefore, by increasing the market reaction to an acquisition, insider trading laws make it profitable to violate them.
152 citations
TL;DR: In this paper, the authors examined the instruments traded and the structure and practices of stock markets from an Islamic perspective and found that speculative trading is not acceptable in Islam and measures would have to be taken to control speculative trading.
Abstract: Islamic banking, based on the prohibition of interest, is well established throughout the Muslim world Attention has now turned towards applying Islamic principles in equity markets The search for alternatives to Western style markets has been given added impetus in Muslim countries by the turmoil in Asian financial markets in 1997 Common stocks are a legitimate form of instrument in Islam, but many of the practices associated with stock trading are not In this paper the instruments traded and the structure and practices of stock markets are examined from an Islamic perspective Speculation is not acceptable in Islam and measures would have to be taken to control speculative trading In addition short selling and margin trading are severely restricted The use of stock index and equity futures and options are also unlikely to be acceptable within an Islamic market Regulatory authorities in Muslim countries will therefore find a vast array of problems in attempting to structure a trading system that will be acceptable
TL;DR: The authors analyzes stock returns at the close across the stocks of the Russell 1000 using transaction-level data for the period June 1997-July 1998, and complete record of all market-on-close (MOC) order imbalance indications.
Patent•
22 Mar 2000
TL;DR: In this article, a network based trading system and method are provided which combine economies-of-scale enjoyed by institutional investors and mutual funds with direct ownership of securities to permit individual investors to participate in the bond market in a cost effective manner.
Abstract: A network based trading system and method are provided which combine economies-of-scale enjoyed by institutional investors and mutual funds with direct ownership of securities to permit individual investors to participate in the bond market in a cost effective manner. Through team investing, institutional economies-of-scale are created for individuals by allowing groupings of individuals to buy and sell bonds as a “team,” thereby executing one cost-efficient trade in the institutional market rather than many smaller trades in the inefficient retail market. Also, through customer-to-customer (C2C) trading, customers are allowed to negotiate a trade directly with one another as an alternative to selling in the inter-dealer market. The system and method also incorporate an automatic risk assessment and trade approval routine for evaluating a proposed trade of a financial instrument which was received from a customer in an electronic form.
Patent•
25 Sep 2000
TL;DR: In this paper, the authors present a method and system for an automated trading network that continuously collects invisible, anonymous, binding orders and indications of interest to buy and sell specific equity securities at variable, passively determined prices and then executes trades based on these collected orders.
Abstract: A method and system for an automated trading network that continuously collects invisible, anonymous, binding orders and indications of interest to buy and sell specific equity securities at variable, passively determined prices and, then, executes trades based on these collected orders and indications. In general, the binding orders are collected from retail broker-dealers and the binding indications are collected from institutions. The variable, passively determined, non-discrete prices can be linked to the National Best Bid or Offer (NBBO) for each security, or some other prevailing market indicator, at the time a trade is executed. In an embodiment of the method and system, marketable retail orders which match with one or more collected institutional indications, are routed from a Dynamic Order Router (DOR) at each broker-dealer to a Central Order-Match Box (COMB) to be executed against the one or more matched collected institutional indications. The COMB also manages most other aspects of transactions in the method and system and continuously executes trades against the collected institutional indications at improved prices relative to the NBBO.
Patent•
04 Dec 2000
TL;DR: In this paper, a broker-dealer system for automated trading of securities can select a path for sending an order for securities to a terminus market, in which the broker dealer system includes at least one port, the port being coupled through a path to at least a market system, and optionally one or more additional links between the market system and other market systems.
Abstract: Methods and systems for selecting, in a broker-dealer system for automated trading of securities, a path for sending an order for securities to a terminus market, in which the broker-dealer system includes at least one port, the port being coupled through at least one path to at least one terminus market, wherein each path includes at least one direct link between a port and a market system and optionally one or more additional links between the said market system and other market systems, each path having a first terminus at a port and a second terminus at a terminus market, terminus markets being markets to which orders for securities are sent by the broker-dealer system.
TL;DR: This paper provided empirical evidence on the relationship between trading volumes, volatility and bid-ask spreads in foreign exchange markets and found that unexpected trading volumes and volatility are positively correlated, suggesting that both are driven by the arrival of public information, as predicted by the mixture of distributions hypothesis.
Abstract: This paper provides empirical evidence on the relationship between trading volumes, volatility and bid-ask spreads in foreign exchange markets It uses a new data set that includes daily data on trading volumes for the dollar exchange rates of seven currencies from emerging market countries The sample period is 1 January 1998 to 30 June 1999 The results are broadly consistent with the findings of the literature that used futures volumes as proxies for total foreign exchange trading I find that in most cases unexpected trading volumes and volatility are positively correlated, suggesting that both are driven by the arrival of public information, as predicted by the mixture of distributions hypothesis I also find that the correlation between trading volumes and volatility is positive during normal periods but turns negative when volatility increases sharply Finally, the results suggest that volatility and spreads are positively correlated, as suggested by inventory cost models However, contrary to the prediction of these models, I do not find evidence of a significant impact of unexpected trading volumes on spreads
TL;DR: In this paper, the authors show that Swedish index returns exhibit high autocorrelation after days of above average performance of the stock market, after low absolute returns, when trading volume is low, and following Fridays.
Abstract: In accordance with studies for other markets, Swedish index returns exhibit high autocorrelation, (a) after days of above average performance of the stock market, (b) after low absolute returns, (c) when trading volume is low, and (d) following Fridays. Contrary to the non-synchronous trading and the transaction cost hypotheses, all results extend to individual stock returns. It is concluded that autocorrelation patterns are related to the trading patterns of individual investors, and not the cross-security information processing of the market. In particular, the observed autocorrelation structure corresponds to feedback trading.
TL;DR: In this paper, the applicability and validity of trading rules in the Hang Seng Index on the Hong Kong Stock Exchange for the period January 1985 to June 1997, and for two subsamples of equal length, partitioned from the whole sample.
Abstract: The paper investigates the applicability and validity of trading rules in the Hang Seng Index on the Hong Kong Stock Exchange for the period January 1985 to June 1997, and for two subsamples of equal length, partitioned from the whole sample. It is concluded that the Moving Average Oscillator and the Trading Range Break-out rules appear to be present, to varying extents, for all three data samples, although the Trading Range Break-out rule is by far the strongest. In terms of implementation, it is suggested that both the Moving Average Oscillator and Trading Break-out rules, would fail to provide positive abnormal returns, net of transaction costs and the associated opportunity costs of investing. Results are such that statistical significance can be shown when the rules are applied to data periods shorter than used in previous studies. Finally, it is suggested that because there is a tendency for potentially ‘profitable’ trading rules, once documented, to cease existing, further research concerning the H...
TL;DR: The Trading Crowd: An Ethnography of Shanghai Stock Market as discussed by the authors, by Ellen Hertz. New York: Cambridge University Press, 1998. 238 pp., ISBN 978-0.
Abstract: The Trading Crowd: An Ethnography of the Shanghai Stock Market. Ellen Hertz. New York: Cambridge University Press, 1998. 238 pp.
TL;DR: The role of short-term traders in ensuring the pricing efficiency of financial markets is a matter of considerable controversy as discussed by the authors, and the debate on this issue has heightened in the wake of the recent Asian currency crisis, which some governments blamed on the activities of shortterm traders.
Abstract: Previous research documents positive ex-dividend day returns in excess of one percent in the unique institutional setting of Hong Kong, where neither dividends nor capital gains are taxed. Short-term arbitrage trades around the ex-day were hampered by physical settlement procedures. After the recent switch to an electronic settlement system, which enables such trades, ex-day abnormal returns have declined to an insignificant 0.17 percent. This drop is more pronounced for high-yield stocks, which are more likely to attract dividend capture trading. The evidence points to the crucial role of short-term traders in ensuring the pricing efficiency of financial markets. THE ROLE OF SHORT-TERM TRADERS IN FINANCIAL MARKETS is a matter of considerable controversy. The debate on this issue has heightened in the wake of the recent Asian currency crisis, which some governments blamed on the activities of short-term traders. Critics contend that short-term traders engage in speculation, leading to excessive and debilitating volatility in market prices. Others argue that short-term traders perform a useful role by increasing valuable liquidity. Berkman and Eleswarapu (1998) report that regulatory changes on the Bombay Stock Exchange curbing short-term trading had a measurably adverse impact on asset values. Supporters of short-term traders also argue that these traders make a key contribution to the efficiency of financial markets by constantly scouring the markets for arbitrage opportunities. This study examines the impact of the
TL;DR: In this article, the authors provide an empirical description of the relationship between the trading system operated by a stock exchange and the trading behavior of heterogeneous investors who use the exchange, using the cost-of-carry model of futures prices.
Abstract: This paper provides an empirical description of the relationship between the trading system operated by a stock exchange and the trading behaviour of heterogeneous investors who use the exchange. The recent introduction of SETS in the London Stock Exchange provides an excellent opportunity to study the impact of an electronic trading system upon traders who use the exchange. Using the cost-of-carry model of futures prices we estimate (non-linearly) the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of FTSE100 futures contracts relative to the spot prices of the stocks that make up the FTSE100 stock index. We divide the sample period into pre-SETS and post-SETS sample periods and conduct a comparative study of arbitrager behaviour under different trading systems. The results indicate that there has been a significant reduction in the level of transaction costs faced by arbitragers and in the degree of transaction cost heterogeneity. Finally, generalised impulse response functions show that both spot and futures prices adjust more quickly in the post-SETS period. These results suggest that both spot and futures markets have become more efficient under SETS.
TL;DR: In this paper, the trading behavior of informed and uninformed investors in a screen-based, order-driven environment is investigated and it is shown that the interaction of informed traders and uninformated traders plays a significant role in determining corporate liquidity.
Abstract: The purpose of our study is to investigate the trading behavior of informed and uninformed investors in a screen-based, order-driven environment. As more and more exchanges conduct trading through electronic limit-order books, it is increasingly important to analyze consequent trading behavior and its impact on the liquidity provision process. We examine one of the largest electronic, order-driven markets in the world, the Stock Exchange of Hong Kong. Our findings show that the interaction of informed and uninformed traders plays a significant role in determining corporate liquidity.
Patent•
24 May 2000
TL;DR: In this article, a trade manager receives offers from trading agents and compares the true values of buyers and sellers across a range of attribute values, and finds a set of attributes that have the maximum net value.
Abstract: An electronic exchange creates and distributes value among trading partners in a trade. Trading agents for the trading partners use a value manager to store true values for a trading element in the trade. The true values are the values perceived by the trading partner, but are not shown to other trading partners. These true values vary with attributes of the trading element. The attributes modify the trading element and are valued differently by different trading partners. A trade manager receives offers from trading agents. The offers are sent with the true values and the attribute values. The trade manager compares true values of buyers and sellers across a range of attribute values. Net values are computed as the difference of a buyers' sum and a sellers' sum. The buyers' sum is the sum of all true values from buyer trading agents, while the sellers' sum is the sum of the true values of all seller trading agents. The trade manager finds a set of attribute values that has a maximum net value. The trade is conducted for the trading element with the attributes that maximizes the net value. The net value is then allocated among the electronic exchange and the buyer and seller trading partners.
TL;DR: In this paper, two of the simplest and most popular trading rules, the moving average and trading range break-out, were tested in the Chilean stock market and the results showed that buy signals consistently generate higher returns than sell signals.
TL;DR: In this article, the authors examined the relation between return predictability and the level of trading activity in the Malaysian stock market and found that the returns from a contrarian portfolio strategy are positively related to the volume of trading in the securities.
Abstract: We provide evidence on short-term predictability of stock returns on the Malaysian stock market. We examine the relation between return predictability and the level of trading activity. This is particularly relevant in emerging stock markets, where thin trading is more pervasive. We find that the returns from a contrarian portfolio strategy are positively related to the level of trading activity in the securities. Specifically, the contrarian profits on actively and frequently traded securities are significantly higher than that generated from the low trading activity securities. We find that the differential behavior of high- and low-volume securities is not subsumed by the size effect, although for the small firms, the volume–predictability relation is most pronounced. We also suggest that the price patterns may be related to the institutional arrangement in the Malaysian stock market.
TL;DR: In this paper, the authors analyze the impact of option trading and margin rules on the behavior of informed traders and on the microstructure of stock and option markets and conclude that option trading with or without margin requirements unambiguously improves the informational efficiency of stock prices.
Abstract: We analyze the impact of option trading and margin rules on the behavior of informed traders and on the microstructure of stock and option markets. In the absence of binding margin requirements, the introduction of an options market causes informed traders to exhibit a relative trading bias towards the stock because of its greater information sensitivity. In turn, this widens the stock's bid-ask spread. But when informed traders are subject to margin requirements, their bias towards the stock is enhanced or mitigated depending on the leverage provided by the option relative to the stock, leading to wider or narrower stock bid-ask spreads. The introduction of option trading, with or without margin requirements, unambiguously improves the informational efficiency of stock prices. Margin rules improve market efficiency when stock and option margins are sufficiently large or small but not when they are of moderate size.
TL;DR: In this article, the authors examined a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994.
Abstract: The study examines a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994. We show how various measures of liquidity such as the bid-ask spread, trading volume, and stock price precision improve in somewhat different ways upon transfer to NYSE (Amex). We also find that reductions in trading costs (percentage spread) and in pricing error volatility (Hasbrouck's σ5) can explain most of stock market's positive response to exchange listing. Thus, liquidity has many facets and cannot be represented by the bid-ask spread alone.
Patent•
28 Nov 2000TL;DR: In this article, a method and system is provided for automated trading of fixed income securities which enables institutional investors, broker dealers and others, to transact directly and anonymously for the purpose of trading investment grade, high yield corporate bonds, municipal bonds or other fixed-income securities.
Abstract: A method and system is provided for automated trading of fixed income securities which enables institutional investors, broker dealers and others, to transact directly and anonymously for the purpose of trading investment grade, high yield corporate bonds, municipal bonds or other fixed income securities. A financial institution acting as a Fixed Income Securities system sponsor can act as counterparty to transactions, from trade execution through settlement, and can also serve as a credit intermediary. Computer systems are utilized in conjunction with an electronic communications network to facilitate such fixed income security trading activities. Software routines can direct a trader to various fixed income securities available according to specific criteria put forth by the trader. Software routines can also provide information and services related to the automated trading of fixed income securities. Data relating to trading a fixed income security is transmitted from a Fixed Income Trading (FIT) system and information relating to the sale of a fixed income security is received. A live order, based upon the sale information received, can then be executed or transmitted to a point of execution. The live order provides that the FIT system acts as counterparty to each transaction such that a client trader can remain anonymous to a party on the other side of a trade. In this manner, a first trade can be executed between a party selling a fixed income security and the FIT system, and a second trade can be executed between the FIT system and a party purchasing the fixed income security. In addition, the FIT system operators can commit to market liquidity for the fixed income security traded. Numerous types of fixed income securities can be traded, including investment grade, high yield corporate bonds, municipal bonds or other types of securities.
TL;DR: In this article, the authors investigate the possibility that in the foreign exchange market uninformed speculators find it convenient to trade on noise in order to gain an informational advantage they can exploit in future.
TL;DR: In this article, genetic programming was used to generate trading and hedging rules in Standard & Poor’s 500 spot and futures markets, and the results suggested that the spot market was quite efficient with most genetically generated trading rules duplicating the buy-and-hold strategy.
Abstract: In this study, genetic programming, an optimization technique based on the principles of natural evolution, was used to generate trading and hedging rules in Standard & Poor’s 500 spot and futures markets. I adopted a realistic trading process that included reasonable transaction costs, obtainable execution prices, and all the unique features of futures trading. The results suggested that the spot market was quite efficient with most genetically generated trading rules duplicating the buy-and-hold strategy. Most of the trading activities of these trading programs were in the futures market, where transaction costs were substantially lower. The out-of-sample performance of these trading rules varied from year to year, indicating that genetic programming could not consistently find outperforming technical trading rules. Some evidence was found for the superior market-timing abilities of these rules. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:911–942, 2000