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Showing papers on "Algorithmic trading published in 2001"


Journal ArticleDOI
TL;DR: In this paper, the authors investigate the role of trading activity in terms of the information it contains about future prices and find that stocks experiencing unusually high ~low! trading volume over a day or a week tend to appreciate ~depreciate! over the course of the following month.
Abstract: The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high ~low! trading volume over a day or a week tend to appreciate ~depreciate! over the course of the following month. We argue that this high-volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results. THE OBJECTIVE OF THIS PAPER is to investigate the role of trading activity in terms of the information it contains about future prices. More precisely, we are interested in the power of trading volume in predicting the direction of future price movements. We find that individual stocks whose trading activity is unusually large ~small! over periods of a day or a week, as measured by trading volume during those periods, tend to experience large ~small! returns over the subsequent month. In other words, a high-volume return premium seems to exist in stock prices. The essence of our paper’s results is captured in Figure 1. In this figure, we show the evolution of the average cumulative return of three groups of stocks: stocks that experienced unusually high, unusually low, and normal trading volume, relative to their recent history of trading volume, on the trading day preceding the portfolio formation date. We see that the stocks that experienced unusually high ~low! trading volume outperform ~are outperformed by! the stocks which had normal trading volume. Moreover, this effect appears to grow over time, especially for the high-volume stocks. We postulate that the high-volume premium is due to shocks in trader interest in a given stock, that is, the stock’s visibility. Miller ~1977! and

884 citations


Journal ArticleDOI
Harald Hau1
TL;DR: In this article, the authors explore informational asymmetries across the trader population: traders located outside Germany in non-German-speaking cities show lower proprietary trading profit and their underperformance is statistically significant, it is also of economically significant magnitude and occurs for the 11 largest German blue-chip stocks.
Abstract: The electronic trading system Xetra of the German Security Exchange provides a unique data source on the equity trades of 756 professional traders located in 23 different cities and eight European countries. We explore informational asymmetries across the trader population: Traders located outside Germany in non-German-speaking cities show lower proprietary trading profit. Their underperformance is not only statistically significant, it is also of economically significant magnitude and occurs for the 11 largest German blue-chip stocks. We also examine whether a trader location in Frankfurt as the financial center, or local proximity of the trader to the corporate headquarters of the traded stock, or affiliation with a large financial institution results in superior trading performance. The data provide no evidence for a financial center advantage or of increasing institutional scale economies in proprietary trading. However, we find evidence for an information advantage due to corporate headquarters proximity for high-frequency (intraday) trading.

634 citations


Journal ArticleDOI
TL;DR: The authors studied the relation between market returns and aggregate flow into U.S. equity funds, using daily flow data and showed that this concurrent relation reflects flow and institutional trading affecting returns.

443 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined different hypotheses about stock splits and found that stock splits attract uninformed traders and that informed trading increases, resulting in no appreciable change in the information content of trades.
Abstract: Extending an empirical technique developed in Easley, Kiefer, and O'Hara (1996), (1997a), we examine different hypotheses about stock splits. In line with the trading range hypothesis, we find that stock splits attract uninformed traders. However, we also find that informed trading increases, resulting in no appreciable change in the information content of trades. Therefore, we do not find evidence consistent with the hypothesis that stock splits reduce information asymmetries. The optimal tick size hypothesis predicts that stock splits attract limit order trading and this enhances the execution quality of trades. While we find an increase in the number of executed limit orders, their effect is overshadowed by the increase in the costs of executing market orders due to the larger percentage spreads. On balance, the uninformed investors' overall trading costs rise after stock splits.

273 citations


Journal ArticleDOI
TL;DR: In this paper, the authors propose a dynamic equilibrium model of asset prices and trading volume with heterogeneous agents fixed transactions costs. And they show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy and a significant illiquidity discount in asset prices.
Abstract: We propose a dynamic equilibrium model of asset prices and trading volume with heterogeneous agents fixed transactions costs. We show that even small fixed costs can give rise to large "no-trade" regions for each agent's optimal trading policy and a significant illiquidity discount in asset prices. We perform a calibration exercise to illustrate the empirical relevance of our model for aggregate data. Our model also has implications for the dynamics of order flow, bid/ask spreads, market depth, the allocation of trading costs between buyers and sellers, and other aspects of market microstructure, including a square-root power law between trading volume and fixed costs which we confirm using historical US stock market data from 1993 to 1997.

242 citations


Patent
30 Apr 2001
TL;DR: In this article, a trading system and method for use on a global communications network such as the Internet and accessible by anyone with Internet access and an account is described. But this system is not suitable for trading asset-based instruments over the Internet.
Abstract: This invention relates to a trading system and method for use on a global communications network such as the Internet and accessible by anyone with Internet access and an account. More particularly, this invention relates to a system and method for using new trading instruments, namely, a system and method for trading new specialized contracts called eContracts, dContracts and oContracts on an open virtual exchange accessible via the Internet. In one embodiment, the present invention discloses a method of trading asset-based instruments over the Internet, comprising the establishing of a plurality of instruments, each comprising a transferable contract to buy or sell the price of a standardized but nondeliverable quantity of a commodity, security, service or other asset; the establishing of an Internet Web site operated by a data processing and page serving system to operate as a virtual marketplace for the trading of the instruments; the receiving of bids at the Web site sent via the Internet from traders wishing to buy at least one of the instruments at a bid price, and offers at the Web site sent via the Internet from other traders wishing to sell at least one of the instruments at an offer price; and automatically or by private negotiation facilitating, calculating, executing, settling and recording at said Web site a transaction for the purchase and sale of at least one of said instruments when said bid price equals said offer price.

211 citations


Journal ArticleDOI
TL;DR: In this paper, a trading system consisting of rules based on combinations of different indicators at different frequencies and lags was developed by a genetic algorithm applied to a number of indicators calculated on a set of US Dollar/British Pound spot foreign exchange tick data from 1994 to 1997 aggregated to various intraday frequencies.
Abstract: Technical analysis indicators are widely used by traders in financial and commodity markets to predict future price levels and enhance trading profitability. We have previously shown a number of popular indicator-based trading rules to be loss-making when applied individually in a systematic manner. However, technical traders typically use combinations of a broad range of technical indicators. Moreover, successful traders tend to adapt to market conditions by 'dropping' trading rules as soon as they become loss-making or when more profitable rules are found. In this paper we try to emulate such traders by developing a trading system consisting of rules based on combinations of different indicators at different frequencies and lags. An initial portfolio of such rules is selected by a genetic algorithm applied to a number of indicators calculated on a set of US Dollar/British Pound spot foreign exchange tick data from 1994 to 1997 aggregated to various intraday frequencies. The genetic algorithm is subseque...

205 citations


Journal ArticleDOI
TL;DR: In this paper, the authors compared the trade execution costs of similar stocks in an automated trading structure and a traditional trading structure, and found that execution costs are higher in Paris than in New York after controlling for differences in adverse selection, relative tick size, and economic attributes across samples.
Abstract: A global trend towards automated trading systems raises the important question of whether execution costs are, in fact, lower than on trading f loors. This paper compares the trade execution costs of similar stocks in an automated trading structure ~Paris Bourse! and a f loor-based trading structure ~NYSE!. Results indicate that execution costs are higher in Paris than in New York after controlling for differences in adverse selection, relative tick size, and economic attributes across samples. These results suggest that the present form of the automated trading system may not be able to fully replicate the benefits of human intermediation on a trading f loor. A TRADING MECHANISM IS DEF INED by the distinctive set of rules that govern the

183 citations


Journal ArticleDOI
TL;DR: In this paper, the performance of one group of technical trading rules using index data for four emerging South Asian capital markets (the Bombay Stock Exchange, the Colombo stock exchange, the Dhaka Stock Exchange and the Karachi Stock Exchange) and examines the implications of the results for the weak form of the efficient market hypothesis.

178 citations


Journal ArticleDOI
TL;DR: In this article, the authors empirically analyzed whether the degree of trader anonymity is related to the probability of information-based trading in the German stock market and found that the probability for informed trading is significantly lower in the floor based trading system.

169 citations


Patent
15 Nov 2001
TL;DR: In this article, an Internet based real-time interactive electronic trading system for broadcasting quotes, usually bid and ask prices, for high-yield corporate bonds to buyers and sellers in a fully encrypted manner.
Abstract: An Internet based real-time interactive electronic trading system for broadcasting quotes, usually bid and ask prices, for high-yield corporate bonds to buyers and sellers in a fully encrypted manner. Further, it processes orders and executes trades between clients. In addition to fully automating the entire high yield bond trading process, the system maintains a full audit trail of every event in the trading process. The system permits direct but anonymous trading which permits both buyers and sellers to see the price at which they will trade and avoids the need, and cost, for an intermediary. It allows the sale of municipal Bonds in an anonymous and transparent market and allows the purchaser of Municipal Bonds to contemporaneously insure their Bond purchase from default electronically through a municipal bond insurance provider, such as MBIA Insurance Corporation, when making the purchase. The system permits direct but anonymous trading of Convertible debt and Emerging Market Debt as well as providing transparency and liquidity not previously attainable in those markets.

Journal ArticleDOI
TL;DR: In this article, the authors examine the relationship between ownership structure and informed trading and find that individual investors are less informed relative to institutions and insiders, which is consistent with economies of scale in information acquisition and aggregation, and with recent research indicating that market makers move prices in response to trades by institutions.
Abstract: This paper examines the relationship between ownership structure and informed trading. We attempt to reconcile some puzzling results in recent empirical literature about the impact of ownership on informed trading using a comprehensive set of proxies for informed trading and a recent sample of firms from three U.S equity exchanges. As proxies for informed trading, we use four measures: (1) The relative spread, (2) the adverse selection component of the spread, constructed as in Huang and Stoll (1997), (3) the price impact of a trade, following Foster and Viswanathan (1993) and Hasbrouck (1991), and (4) the probability of informed trading constructed as in Easley, Kiefer, O'Hara and Paperman (1996). We find strong evidence of a cross-sectional relationship between our measures of informed trading and ownership by institutions and insiders. Our results are robust to a variety of estimation techniques, control variables, and proxies for informed trading. Overall, our results suggest that individual investors are less informed relative to institutions and insiders. These findings are consistent with economies of scale in information acquisition and aggregation, and with recent research that indicates that market makers move prices in response to trades by institutions.

Journal ArticleDOI
TL;DR: In this article, the authors consider a market microstructure model in which the rates of public and private informa? tion arrival are probabilistic, and the latter depends on the availability of private information that is stochastically changing over time.
Abstract: I consider a market microstructure model in which the rates of public and private informa? tion arrival are probabilistic. The latter depends on the availability of private information that is stochastically changing over time. In equilibrium, traders estimate the availability of private information using past periods' trading volume and use this information to adjust their strategies. The time-series properties include contemporaneous correlation between price variability and volume and autocorrelation in price variability (similar to GARCH). The model explains why trading volume contains useful information for predicting volatil? ity and provides predictions on the limit and market order placement strategies of traders.

Journal ArticleDOI
TL;DR: This article study a sample of Paris Bourse stocks that were transferred between call trading and continuous trading and find that frequently traded stocks that are transferred from call trading to continuous trading experience, on average, liquidity improvements that are positively associated with price appreciation.

Patent
08 Mar 2001
TL;DR: In this paper, a trading process having a trading methodology selected by a user is operative to interact with market processes having respective market methodologies, and the trading process and the market processes are supported on a platform that also supports platform processes for providing services to the trading processes and market processes.
Abstract: A trading process having a trading methodology selected by a user is operative to interact with market processes having respective market methodologies. The trading process and the market processes are supported on a platform that also supports platform processes for providing services to the trading processes and market processes. The trading processes interact with each other and with external markets through the market processes.

Journal ArticleDOI
TL;DR: This paper found that there is a significant increase in trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger, which supports the hypothesis that the options market plays an important role in price discovery.
Abstract: This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery.

Patent
18 Jul 2001
TL;DR: In this article, a scalable system for an electronic commodities trading marketplace along with ancillary tools provide an electronic trading center for world market commodity importers, exporters, and the intermediaries and processors between them.
Abstract: A method and system for an electronic commodities trading marketplace along with ancillary tools provide an electronic trading center for world market commodity importers, exporters, and the intermediaries and processors between them. This trading center is offered through its website centered around a 24-hour exchange that provides trading markets for commodities such as coffee, sugar, cocoa and cotton. The scalable system provides aggregated third party services linked to both front and back office operations. These services can include items such as live futures quotes and real-time news, futures brokerage, banking and finance links and resources, and a suite of applications tailored to members' specific risk-management and end-to-end contract execution needs. The system also provides access to shipping related services such as freight brokerage, direct booking for liner transport, load and discharge supervision and laboratory testing.

Journal ArticleDOI
TL;DR: In this paper, the authors present evidence that positive feedback trading activity is also present in emerging capital markets but mostly during market declines, indicating that feedback trading may be partially responsible for stock return autocorrelations becoming negative and volatility rises.
Abstract: Positive feedback trading can induce autocorrelation in stock returns and increase volatility. If large numbers of market participants engage in positive feedback trading strategies asset prices may deviate substantially and persistently from fundamental values. Recent studies show evidence of positive feedback trading (i.e. selling during market declines and buying during market advances) in developed stock markets. The paper presents evidence that positive feedback trading activity is also present in emerging capital markets but mostly during market declines. During such periods stock return autocorrelations become negative and volatility rises. Volatility is in all cases higher during market declines suggesting that feedback trading may be partially responsible.

Patent
04 Sep 2001
TL;DR: In this paper, the authors present a method and system of presenting data and analysis for use in stock market trading, which includes the steps of receiving stock information from a stock data provider, and then analyzing the stock information to generate historical stock trading information.
Abstract: The present invention is directed to a method and system of presenting data and analysis for use in stock market trading. The method includes the steps of receiving stock information from a stock data provider, and then analyzing the stock information to generate historical stock trading information. Graphical displays showing the historical stock trading information along with basic stock information are then generated in such a manner to facilitate rapid understanding of the information being displayed.

Journal ArticleDOI
TL;DR: In this article, the London International Financial Futures and Options Exchange (LIFFE) transferred trading in the Financial Times Stock Exchange (FTSE) 100 Index futures contracts from outcry to LIFFE CONNECT, its electronic trading system.
Abstract: On May 10, 1999, the London International Financial Futures and Options Exchange (LIFFE) transferred trading in the Financial Times Stock Exchange (FTSE) 100 Index futures contracts from outcry to LIFFE CONNECT, its electronic trading system. We find lower spreads in the electronic market after the transition. However, the open outcry mechanism has higher market quality (or smaller variance of the pricing error) on the basis of Hasbrouck's (1993) model. Furthermore, employing the Hasbrouck (1991) model, we show that trades in the open outcry market have higher information content. Inventory control considerations also affect the electronic market more than the open outcry market. The overall results suggest that electronic trading should complement, but not replace, open outcry in futures markets. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21: 713–735, 2001

Patent
19 Jun 2001
TL;DR: In this paper, a method of communicating trade orders in a marketplace for financial instruments through an on-line trading account with a financial institution was provided, which includes receiving trade trigger criteria and market data for use by market analysis software.
Abstract: In accordance with the present invention, there is provided a method of communicating trade orders in a marketplace for financial instruments through an on-line trading account with a financial institution. The method includes receiving trade trigger criteria and market data for use by market analysis software. The method further includes accessing the market analysis software to generate a trade decision using the trade trigger criteria and the market data. The method further includes automatically communicating a trade order, based upon the trade decision, to the marketplace via the on-line trading account.

Journal ArticleDOI
TL;DR: In this article, the authors employed a joint variance ratio test and technical trading rules to examine the random walk behavior for nine Asian foreign exchange rates for the period 1988-1995, concluding that there is little evidence of serial correlations in the daily exchange rate series.

Journal ArticleDOI
TL;DR: In this paper, the effect of circuit breakers on price behavior, trading volume, and profit-making ability in a market setting was analyzed. But, the authors found that the presence of a circuit breaker rule does not affect the magnitude of the absolute deviation in price from fundamental value or trading profit.

Book ChapterDOI
TL;DR: The authors found that the majority of traders are willing to trade patiently if this reduces execution costs, and that they frequently delay trades to obtain better prices, but little hard evidence exists about the demand for immediacy.
Abstract: Practitioners and students of the securities markets widely assume that traders demand immediate execution of their orders. However, little hard evidence exists about the demand for immediacy. This monograph analyzes the issue and presents the results of the responses to a questionnaire that we have sent to equity traders through TraderForum of the Institutional Investor. The respondents manage in total a very significant percentage of equity assets under management in the United States. The focus of the questions was the extent of the demand for immediate execution of orders. We found that the majority of traders are willing to trade patiently if this reduces execution costs. Many traders indicate that they frequently delay trades to obtain better prices. Most respondents indicate that they are typically given more than a day to implement a large order, that they typically break up more than 20% of their large orders for execution over time, and that they regularly take more than a day for a large order that has been broken into lost to be executed completely. There is a generally positive view of alternative electronic trading systems, such as Instinet and Investment Technology Group’s POSIT. The key motives for trading on these systems are reduced market impact, lower spreads, better liquidity, and anonymity. Changes that would make alternative electronic systems more attractive are an increase in execution rates and more convenient times of trading. Also, alternative electronic systems would be used more if the traders did not have soft dollar arrangements.

Patent
08 Mar 2001
TL;DR: In this paper, a platform supports multiple processes, including market processes having respective market methodologies, trading processes having trading methodologies and platform processes providing services to the market processes and trading processes, and representation processes for coupling the market process to external markets.
Abstract: A platform supports multiple processes, including market processes having respective market methodologies, trading processes having trading methodologies, platform processes providing services to the market processes and trading processes, and representation processes for coupling the market processes to external markets. The trading processes interact with each other and with external markets through the market processes.

Journal ArticleDOI
TL;DR: In this paper, the effects of decimalization for a sample of NYSE-listed common stocks trading in decimals were studied and it was shown that the most popular quoted spread is 1 cent and the available depths at the best bid and ask prices are also significantly lower.
Abstract: Using high-frequency data and a carefully constructed 1-1 matched sample of control (non decimal) stocks, we isolate the effects of decimalization for a sample of NYSE-listed common stocks trading in decimals. We find that decimalization has resulted in significantly lower quoted and effective bid/ask spreads and that the most popular quoted spread is 1 cent. The available depths at the best bid and ask prices are also significantly lower. Together, these spread-depth results deliver a mixed verdict on market liquidity after decimalization. We find that decimalization has resulted in significant increases (decreases) in relatively smaller size (larger size) trades and trading volume. The frequency of quote updates and autoquotes in decimal stocks following decimalization has also increased significantly. Regional stock exchanges also appear to be significantly more active in competing for order flow. Our results have important research and policy implications.

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the impact of salient political and economic news on the intraday trading activity, namely, the stock return volatility, stock price volatility, the number of shares traded, and the trading frequency.
Abstract: This paper investigates the impact of salient political and economic news on the intraday trading activity, namely, the stock return volatility, the stock price volatility, the number of shares traded, and the trading frequency. Using transactions data on 33 constituent stocks of the Hang Seng Index in the Stock Exchange of Hong Kong (SEHK), we find that political news has a distinct impact on market activity when compared with economic news. We argue that the observed phenomenon is related to the precision of signals associated with these two types of news and investors' perceptual biases.

Journal ArticleDOI
TL;DR: In this paper, a single-stage stochastic cost frontier approach is employed, which generates exchange inefficiency scores based on a unique unbalanced panel data set for all major European financial exchanges over the period 1985-1999.
Abstract: This paper provides an explanation of technical inefficiencies of financial exchanges in Europe as well as an empirical analysis of their existence and extent. A single-stage stochastic cost frontier approach is employed, which generates exchange inefficiency scores based on a unique unbalanced panel data set for all major European financial exchanges over the period 1985-1999. Overall cost inefficiency scores reveal that European exchanges operate at 20-25% above the efficiency benchmark. The results also affirm that size of exchange; market concentration and quality; structural reorganisations of exchange governance; diversification in trading service activities; and adoption of automated trading systems significantly influence the efficient provision of trading services in Europe. Over the sample period, European exchanges notably improved their ability to efficiently manage their production and input resources.

Journal ArticleDOI
TL;DR: In this paper, transaction data from the electronic trading system Xetra of the German Security Exchange is used to explore the relationship between trader location and trading profitability, which confirms the hypothesis of financial market segmentation due to international information barriers.

Journal ArticleDOI
TL;DR: In this article, the authors extend the existing evidence on this topic by applying the moving average (MA) and channel (CH) trading rules to 13 Latin currencies to see if opportunities for profitable trading exist.