Showing papers on "Algorithmic trading published in 2002"
Book•
01 Jan 2002
TL;DR: In this paper, the authors discuss the structure of trade, the benefits of trade and the origins of liquidity and volatility in the world. But they focus on the role of suppliers.
Abstract: PART I: THE STRUCTURE OF TRADING PART II: THE BENEFITS OF TRADE PART III: SPECULATORS PART IV: LIQUIDITY SUPPLIERS PART V: ORIGINS OF LIQUIDITY AND VOLATILITY PART VI: EVALUATION AND PREDICTION PART VII: MARKET STRUCTURES
796 citations
TL;DR: In this paper, a market maker based method of price formation is used to study the price dynamics induced by several commonly used financial trading strategies, showing how they amplify noise, induce structure in prices, and cause phenomena such as excess and clustered volatility.
Abstract: A deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices. This paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies, showing how they amplify noise, induce structure in prices, and cause phenomena such as excess and clustered volatility.
397 citations
TL;DR: This paper examined the relationship between stock market trading volume and returns for both domestic and cross-country markets by using the daily data of the three largest stock markets: New York, Tokyo, and London.
Abstract: This paper examines the dynamic relations – causal relations and the sign and magnitude of dynamic effects – between stock market trading volume and returns (and volatility) for both domestic and cross-country markets by using the daily data of the three largest stock markets: New York, Tokyo, and London. Major findings are as follows: First, trading volume does not Granger-cause stock market returns on each of three stock markets. Second, there exists a positive feedback relationship between trading volume and return volatility in all three markets. Third, regarding the cross-country relationships, US financial market variables, in particular US trading volume, contains an extensive predictive power for UK and Japanese financial market variables. Fourth, sub-sample analyses show evidence of stronger spillover effects after the 1987 market crash and an increased importance of trading volume as an information variable after the introduction of options in the US and Japan.
376 citations
TL;DR: In this article, an order-driven market model with heterogeneous agents trading via a central order matching mechanism is introduced, where traders set bids and asks and post market or limit orders according to exogenously fixed rules.
Abstract: We introduce an order-driven market model with heterogeneous agents trading via a central order matching mechanism. Traders set bids and asks and post market or limit orders according to exogenously fixed rules. We investigate how different trading strategies may affect the dynamics of price, bid-ask spreads, trading volume and volatility. We also analyse how some features of market design, such as tick size and order lifetime, affect market liquidity. The model is able to reproduce many of the complex phenomena observed in real stock markets. *Paper presented at Applications of Physics in Financial Analysis (APFA) 3, 5–7 December 2001, Museum of London, UK.
273 citations
TL;DR: In this article, the authors use a sample of 158 closed-end funds to show that noise-trader sentiment, as proxied by retail-investor flows, leads to fluctuations in the discount.
Abstract: If arbitrage is costly and noise traders are active, asset prices may deviate from fundamental values for long periods of time. We use a sample of 158 closed-end funds to show that noise-trader sentiment, as proxied by retail-investor flows, leads to fluctuations in the discount. Nevertheless, we reject the hypothesis that noise-trader risk is the cause of the long-run discount. Instead we find that funds which are more difficult to arbitrage have larger discounts, due to: (1) the censoring of the discount by the arbitrage bounds, and (2) the freedom of managers to increase charges when arbitrage is costly. Copyright The American Finance Association 2002.
258 citations
TL;DR: In this article, the authors hypothesize that firms' 10-K market risk disclosures, recently mandated by SEC Financial Reporting Release No. 48 (FRR No. 6), reduce investors' uncertainty and diversity of opinion about the implications, for firm value, of changes in interest rates, foreign currency exchange rates, and commodity prices.
Abstract: We hypothesize that firms' 10‐K market risk disclosures, recently mandated by SEC Financial Reporting Release No. 48 (FRR No. 48), reduce investors' uncertainty and diversity of opinion about the implications, for firm value, of changes in interest rates, foreign currency exchange rates, and commodity prices. We argue that this reduced uncertainty and diversity of opinion should dampen trading volume sensitivity to changes in these underlying market rates or prices. Consistent with this hypothesis, we find that after firms disclose FRR No. 48‐mandated information about their exposures to interest rates, foreign currency exchange rates, and energy prices, trading volume sensitivity to changes in these underlying market rates and prices declines, even after controlling for other factors associated with trading volume. The observed declines in trading volume sensitivity are consistent with FRR No. 48 market risk disclosures providing useful information to investors.
233 citations
TL;DR: In this paper, the authors examined three emerging Gulf markets examined in this paper, and found that correction for infrequent trading significantly alters the results of market efficiency and random walk tests, and the Beveridge-Nelson decomposition of index returns is done to estimate the underlying index.
Abstract: Inferences drawn from tests of market efficiency are rendered imprecise in the presence of infrequent trading. As the observed index in thinly traded markets may not represent the true underlying index value, there is a systematic bias toward rejecting the efficient market hypothesis. For the three emerging Gulf markets examined in this paper, correction for infrequent trading significantly alters the results of market efficiency and random walk tests. The Beveridge–Nelson (1981) decomposition of index returns is done to estimate the underlying index.
228 citations
Patent•
04 Sep 2002
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.
225 citations
Posted Content•
TL;DR: This article examined patterns in abnormal returns in the days around these trades on the London Stock Exchange and found that medium-sized trades are more informative for short-term returns than large ones, consistent with Barclay and Warner's (1993) stealth trading hypothesis whereby informed traders avoid trading in blocks.
Abstract: Previous work examined the long-run profitability of strategies mimicking the trades company directors in the shares of their own company, as a way of testing for market efficiency. The current paper examines patterns in abnormal returns in the days around these trades on the London Stock Exchange. We find movements in returns that are consistent with directors engaging in short-term market timing. We also report that some types of trades have superior predictive content over future returns. In particular, medium-sized trades are more informative for short-term returns than large ones, consistent with Barclay and Warner's (1993) "stealth trading" hypothesis whereby informed traders avoid trading in blocks. Another contribution of this study is to properly adjust the abnormal return estimates for microstructure (spread) transactions costs using daily bid-ask spread data. On a net basis, we find that abnormal returns all but disappear.
162 citations
TL;DR: In this paper, the authors analyzed the impact of a Web-based trading channel on trader behavior and performance in two large corporate 401(k) plans and found that trading frequency at sample firms doubled relative to a control group of firms without a Web channel.
146 citations
TL;DR: In this paper, the authors provided an analysis of the nature and evolution of a dealer market for Nasdaq stocks and found that despite size differences in sample stocks, there is a surprising consistency to their trading.
Abstract: This paper provides an analysis of the nature and evolution of a dealer market for Nasdaq stocks. Despite size differences in sample stocks, there is a surprising consistency to their trading. One dealer tends to dominate trading in a stock. Markets are concentrated and spreads are increasing in the volume and market share of the dominant dealer. Entry and exit are ubiquitous. Exiting dealers are those with very low profits and trading volume. Entering market makers fail to capture a meaningful share of trading or profits. Thus, free entry does little to improve the competitive nature of the market as entering dealers have little impact. We find, however, that for small stocks, the Nasdaq dealer market is being more competitive than the specialist market.
TL;DR: In this article, the authors analyzed the effect of the introduction of stock index futures on the volatility of the Italian Stock Exchange and found that the impact of futures onset on the underlying market volatility is likely to be immediate.
Abstract: The impact of futures trading on the underlying asset volatility, and its characteristics, is still debated both in the economic literature and among practitioners. The aim of this study is to analyse the effect of the introduction of stock index futures on the volatility of the Italian Stock Exchange. This study mainly addresses two issues: first, the study analyses whether the reduction of stock market volatility showed in the post-futures period, already pointed out in previous research, is effectively due to the introduction of futures contract. Second, whether the ‘futures effect’, if confirmed, is immediate or delayed with respect to the moment of the futures trading onset is tested. The results show that the introduction of stock index futures per se has led to diminished stock market volatility and no other contingent cause seems to have systematically reduced it. Further, they also suggest that the impact of futures onset on the underlying market volatility is likely to be immediate. These findin...
TL;DR: In this paper, the authors analyzed price discovery in floor-based and electronic exchanges using data from the German stock market and found that both markets contribute to price discovery, and the contributions of the two trading systems to the process of price discovery are almost equal when transaction prices are used for the estimation.
TL;DR: A recognizer for two variations of the ‘bull flag’ technical charting heuristic is implemented and this recognizer is used to discover trading rules on the NYSE Composite Index.
Abstract: In this case study in knowledge engineering and data mining, we implement a recognizer for two variations of the ‘bull flag’ technical charting heuristic and use this recognizer to discover trading rules on the NYSE Composite Index. Out-of-sample results indicate that these rules are effective.
TL;DR: The authors characterizes the temporal pattern of trading rule returns and official intervention for Australian, German, Swiss, and U.S. data to investigate whether intervention generates technical trading rule profits.
TL;DR: In this article, an empirical analysis on technical trading rules (the simple price moving average, the momentum, and trading volume) utilizing the NYSE value-weighted index over the period 1962-1996, as well as, three sub-periods.
Abstract: This study consists of an empirical analysis on technical trading rules (the simple price moving average, the momentum, and trading volume) utilizing the NYSE value-weighted index over the period 1962–1996, as well as, three subperiods. The methodologies employed include the traditional t-test and residual bootstrap methodology utilizing random walk, GARCH-M and GARCH-M with some instrument variables. The results indicate that the technical trading rules add a value to capture profit opportunities over a buy-hold strategy. When the trading rules are applied to the different sub-samples, the results are weaker in the last sub-period, 1985–1996. This may imply that the market is getting efficient in information over the recent years because of technological improvements.
TL;DR: In this article, the authors investigated the profitability and information content of insider trading in the Spanish stock market and found that insiders earn excess profits when investing on corporate nonpublic information, while outsiders mimicking them fail to obtain those excess returns.
TL;DR: In this paper, moving average based rules are used as specification tests on the process for foreign exchange rates and the results show that these simple models can not capture some aspects of the series studied, and the economic significance of the trading rule results are tested.
Abstract: This paper performs tests on several different foreign exchange series using a methodology inspired by technical trading rules. Moving average based rules are used as specification tests on the process for foreign exchange rates. Several models for regime shifts and persistent trends are simulated and compared with results from the actual series. The results show that these simple models can not capture some aspects of the series studied. Finally, the economic significance of the trading rule results are tested. Returns distributions from the trading rules are compared with returns on risk free assets and returns from the U.S. stock market. (This abstract was borrowed from another version of this item.)
Posted Content•
TL;DR: In this paper, the authors investigated the presence of abnormal returns through the use of trading strategies that exploit the predictability of short run stock price movements and identified profitable momentum trading strategies as investment tools over the period 1955-96.
Abstract: This paper investigates the presence of abnormal returns through the use of trading strategies that exploit the predictability of short run stock price movements. Based on historical returns of the largest set of individual securities in the UK stock market examined to date, this paper identifies profitable momentum trading strategies as investment tools over the period 1955-96. Our results show that returns on trading strategies cannot be accounted for by a simple adjustment for beta-risk. Also, although we find some evidence of a size effect in the UK stock market, this phenomenon cannot explain the momentum profits. The paper finds that these profitable investment strategies are apparent in the sub-sample 1977-96, in line with Liu, Strong and Xu (1999). However, they are not present in the earlier 1955-76 period. The implication is that momentum is not a general feature of the UK stock market, but is only apparent over certain time periods.
TL;DR: In this paper, the authors test the hypothesis that insider trading impairs market liquidity, by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995-1999.
Abstract: We test the hypothesis that insider trading impairs market liquidity, by analyzing intraday trades and quotes around 1,497 IPO lockup expirations in the period 1995-1999. We find that, while lockup expirations are associated with considerable insider trading for some IPO firms, they have little effect on effective spreads. By contrast, two other liquidity measures, quote depth and trading activity, improve substantially. In the 23% of lockup expirations where insiders disclose share sales, spreads actually decline. These findings indicate that a large body of well-informed, blockholding insider traders can enter a market from which they had previously been absent, and substantially change trading volume and share price, without impairing market liquidity.
TL;DR: This paper argued that when the negative aspects of insider trading, namely the agency problems that it may create, are considered, it is necessary to engage in comparative institutional analysis and how these problems can be resolved under two different economic systems: the market economy and interventionism.
Abstract: The insider trading debate traditionally discusses the pros and cons of insider trading and draws a conclusion about the desirability or undesirability of public regulation of insider trading. One of the most important arguments against insider trading is that it generates agency problems that shareholders cannot resolve and that, therefore, insider trading should be publicly regulated. We have challenged this argument for failing to engage in comparative institutional analysis. We argued that when the negative aspects of insider trading, namely, the agency problems that it may create, are considered, it is necessary to engage in comparative institutional analysis and how these problems can be resolved under two different economic systems: the market economy and interventionism.
TL;DR: In this paper, the authors used the move of Israeli stocks from call auction trading to continuous trading to show that investors have a preference for stocks that trade continuously, and they showed that a move to a continuous trading environment increases the volume of large stocks relative to small stocks.
Abstract: We use the move of Israeli stocks from call auction trading to continuous trading to show that investors have a preference for stocks that trade continuously. When large stocks move from call auction to continuous trading, the small stocks that still trade by call auction experience a significant loss in volume relative to the overall market volume. As small stocks move to continuous trading, they experience an increase in volume and positive abnormal returns because of the associated increase in liquidity. Overall, though, a move to continuous trading increases the volume of large stocks relative to small stocks.
TL;DR: In this paper, a study of the trading characteristics of UK company directors was carried out and it was shown that although the close period affects the timing of director trades, it is unable to affect their performance or distribution.
Patent•
21 Mar 2002
Abstract: A method for the automated trading of securities, a computer system for carrying out the method, and computer software product containing logic for carrying out the method are disclosed. The system and method integrate information acquired from an investment advice system about a security and places trades with a brokerage system based on the acquired investment advice information. The parameters used to determine whether or not a specified security is to be traded can be a default parameter or a trading parameter specified by a user via a graphical user interface. The trading parameters set the constraints within which the information acquired from the investment advice system is analyzed.
TL;DR: In this article, the authors investigate whether the double auction institution can suppress market power in emissions trading markets, and they find clear evidence of successful use of market power, showing that average prices rise under monopoly and fall under monopsony.
TL;DR: In this paper, the effect of derivatives (futures and options) in the Spanish market on the volatility and on the trading volume of the underlying index was analyzed, which covers from October 1990 to December 1994.
Abstract: This paper analyses the effect of the introduction of derivatives (futures and options) in the Spanish market on the volatility and on the trading volume of the underlying index. The period analysed covers from October 1990 to December 1994. To study this effect, a GJR model is used. It is found, that although the asymmetry coefficient has increased, the conditional volatility of the underlying index declines after derivative markets are introduced. The trading volume of Ibex-35 increases significantly. Consequently, the introduction of the derivative contracts in Spain confirms a decrease in uncertainty in the underlying market and an increase in liquidity, which possibly enhances their efficiency.
TL;DR: In this article, the authors discuss how a network of autonomous archiving sites can trade data to achieve the most reliable replication in peer-to-peer data archiving systems by trading blocks of space (deeds).
Abstract: Data archiving systems rely on replication to preserve information. This paper discusses how a network of autonomous archiving sites can trade data to achieve the most reliable replication. A series of binary trades among sites produces a peer-to-peer archiving network. Two trading algorithms are examined, one based on trading collections (even if they are different sizes) and another based on trading equal sized blocks of space (which can then store collections). The concept of deeds is introduced; deeds track the blocks of space owned by one site at another. Policies for tuning these algorithms to provide the highest reliability, for example by changing the order in which sites are contacted and offered trades, are discussed. Finally, simulation results are presented that reveal which policies are best. The experiments indicate that a digital archive can achieve the best reliability by trading blocks of space (deeds), and that following certain policies will allow that site to maximize its reliability.
TL;DR: In this article, a continuous time version of Holden and Subrahmanyam (1994) 181) was introduced by introducing risk aversion on the side of the monopolist informed trader and allowing for the liquidity traders instantaneous demand to depend on cost of trading, as well as on the risk of the stock.
TL;DR: This paper investigated whether different types of institutions have discernible trading motives in response to portfolio disclosures and found that banks, life insurance companies, mutual funds, and investment advisors who act as external managers generally have similar trading strategies.
Abstract: This paper investigates whether different types of institutions have discernible trading motives in response to portfolio disclosures Results show that banks, life insurance companies, mutual funds, and investment advisors who act as external managers generally have similar trading strategies They sell more poorly performing stocks during the fourth quarter than the first three quarters of the year, and such trading behavior is more pronounced for institutions whose stocks on average have underperformed the market In contrast, property and liability insurance companies, internally-managed pension funds, colleges, universities, and foundations, who mainly provide their own asset management services, show less inclination to window dress their portfolios
TL;DR: This article examined the role of index futures trading in spot market volatility and found stronger and consistent support for the alternative posture that volatility in the futures market is an outgrowth of a turbulent cash market.
Abstract: We examine the role of index futures trading in spot market volatility. We use the exponential generalized autoregressive conditional heteroskedasticity (EGARCH) approach to measure volatility, analyze causality and feedback relations between volatilities in the spot and futures markets, and test various hypotheses in the context of a multivariate model that incorporates other macrostate variables. Our empirical results suggest index futures trading may not be blamed for the observed volatility in the spot market. Rather, we find stronger and more consistent support for the alternative posture that volatility in the futures market is an outgrowth of a turbulent cash market. We use the regret (cognitive dissonance) theory to explain our results.