Showing papers on "Algorithmic trading published in 2004"
TL;DR: In this paper, the authors investigated the contribution of option markets to price discovery, using a modification of Hasbrouck's (1995) information share approach, and found that option market price discovery is related to trading volume and spreads in both markets, and stock volatility.
Abstract: We investigate the contribution of option markets to price discovery, using a modification of Hasbrouck’s (1995) “information share” approach. Based on five years of stock and options data for 60 firms, we estimate the option market’s contribution to price discovery to be about 17% on average. Option market price discovery is related to trading volume and spreads in both markets, and stock volatility. Price discovery across option strike prices is related to leverage, trading volume, and spreads. Our results are consistent with theoretical arguments that informed investors trade in both stock and option markets, suggesting an important informational role for options. INVESTORS WHO HAVE ACCESS to private information can choose to trade in the stock market or in the options market. Given the high leverage achievable with options and the built-in downside protection, one might think the options market would be an ideal venue for informed trading. If informed traders do trade in the options market, we would expect to see price discovery in the options market. That is, we would expect at least some new information about the stock price to be reflected in option prices first. Establishing that price discovery straddles both the stock and options markets is important for several reasons. In a frictionless, dynamically complete market, options would be redundant securities. This paper contributes to the understanding of why options are relevant in actual markets, by providing the first unambiguous evidence that stock option trading contributes to price discovery in the underlying stock market. Further, we document that the level
740 citations
TL;DR: In contrast to value and momentum investing, the authors argue that arbitrage involves an art of association, the construction of comparability across different assets, and the peculiar valuation that takes place in arbitrage is based on an operation that makes something the measure of something else, associating securities to each other.
Abstract: To analyze the organization of trading in the era of quantitative finance we conduct an ethnography of arbitrage, the trading strategy that best exemplifies finance in the wake of the quantitative revolution. In contrast to value and momentum investing, we argue, arbitrage involves an art of association—the construction of comparability across different assets. In place of essential or relational characteristics, the peculiar valuation that takes place in arbitrage is based on an operation that makes something the measure of something else—associating securities to each other. The process of recognizing opportunities and the practices of making novel associations are shaped by the specific socio-spatial and socio-technical configurations of the trading room. Calculation is distributed across persons and instruments as the trading room organizes interaction among diverse principles of valuation.
511 citations
TL;DR: In this article, the authors propose genetic programming as a means to automatically generate short-term trading rules on the stock markets, rather than using a composite stock index for this purpose, the trading rules are adjusted to individual stocks.
236 citations
TL;DR: In this article, the authors studied cross-sectional variations in stock trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of thirty-six years, and found that trading activity depends on the extent of liquidity trading, the mass of informed agents, and dispersion of opinion about the stock's fundamental value.
Abstract: This paper studies cross-sectional variations in stock trading activity for a comprehensive sample of NYSE/AMEX and Nasdaq stocks over a period of thirty-six years. Our theoretical framework indicates that trading activity depends on the extent of liquidity trading, the mass of informed agents, and dispersion of opinion about the stock's fundamental value. We further postulate that liquidity or noise trading depends both on a stock's visibility and on portfolio rebalancing needs triggered by past stock price performance. We use size, firm age, price, and the book-to-market ratio as proxies for a firm's visibility. The mass of informed agents is proxied by the number of analysts following the stock, while analyst forecast dispersion, systematic risk, and firm leverage proxy for divergence of opinion. Past return is by far the most significant predictor of stock turnover. Forecast dispersion and systematic risk also play important roles in predicting the cross-section of expected trading activity. Stocks that have performed well in a given year experience aggressive buying pressure in the subsequent year, which points to the presence of momentum investing. Overall, the results support theories of trading based on differences of opinion and stock visibility.
219 citations
TL;DR: The first evidence of localized trading is that the time zone of a company's headquarters affects intraday trading patterns in its stock as mentioned in this paper, and firms in blizzard-struck cities see a dramatic trading volume drop compared to firms in other cities, while the Yom Kippur holiday dampens trading volume in companies located in cities with high Jewish populations.
Abstract: We document by several methods that trading in Nasdaq stocks is localized, but find little evidence that cloudy weather in the city in which a company is based affects its returns. The first evidence of localized trading is that the time zone of a company's headquarters affects intraday trading patterns in its stock. Second, firms in blizzard-struck cities see a dramatic trading volume drop compared to firms in other cities. Third, the Yom Kippur holiday dampens trading volume in companies located in cities with high Jewish populations. Despite the strong evidence of localized trading, cloudy conditions near the firm's headquarters do not provide profitable trading opportunities.
218 citations
TL;DR: In this article, the authors test whether moving average trading rule profits have declined over the period from 1971 to 2000, using 18 exchange rate series over a longer time period than in previous studies.
Abstract: Previous studies have reported mixed results regarding the success of technical trading rules in currency markets. Abnormal returns were observed in many studies using data up to the mid 1980s, while more recent studies generally report less success for technical trading rules. This paper tests whether moving average trading rule profits have declined over the period from 1971 to 2000. If so, previous profits may represent a temporary inefficiency that has since been eliminated in the currency markets. The hypothesis is tested using 18 exchange rate series over a longer time period than in previous studies. Rules are optimized for successive 5-year in-sample periods from 1971 to 1995 and tested over subsequent 5-year out-of-sample periods. Results show that risk-adjusted trading rule profits have declined over time-from an average of over 3% in the late 1970s and early 1980s to about zero in the 1990s. Thus, market inefficiencies reported in previous studies may have been only temporary inefficiencies.
204 citations
TL;DR: In this article, the authors examined liquidity externalities by analyzing trading costs after hours and found that less than 1/20 as many trades per unit time after hours as during the trading day were traded.
Abstract: This paper examines liquidity externalities by analyzing trading costs after hours. There is less than 1/20 as many trades per unit time after hours as during the trading day. The reduced trading activity results in substantially higher trading costs: quoted and effective spreads are three to four times larger than during the trading day. The higher spreads reflect greater adverse selection and order persistence, but not higher dealer profits. Because liquidity provision remains competitive after hours, the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day. UNDERSTANDING NETWORK EFFECTS and liquidity externalities is one of the most important outstanding issues in market design (Madhavan (2000)) and market regulation (Macey and O’Hara (1999)). Liquidity externalities arise from bringing traders together in space and time to reduce search and trading costs. Bringing traders together creates liquidity externalities because the additional traders arriving in the marketplace reduce trading costs for all investors. To date, attention has focused almost exclusively on spatial network effects by examining the trading of securities in different markets at the same time (Lee (1993), Hasbrouck (1995), and others). In contrast, this paper studies the effects of temporal consolidation of trades by analyzing trading during and outside of exchange trading hours. A well-known liquidity externality arises from asymmetric information. Rational informed traders break up their orders across markets and over time. This provides incentives for liquidity traders to consolidate their trades geographically (Garbade and Silber (1979), Mendelson (1982, 1987), Pagano (1989a, 1989b)) and intertemporally (Admati and Pfleiderer (1988) and Foster and Viswanathan (1990)). It has been difficult to document the importance of these liquidity externalities, however. Unless there are barriers that restrict the flow of orders from one trading venue to another, in equilibrium, contemporaneous
182 citations
TL;DR: In this paper, the authors investigated the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market.
Abstract: This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.
182 citations
01 Sep 2004
TL;DR: Through a detailed case study on trading S&P 500 index, rough sets is shown to be an applicable and effective tool to achieve the stock prediction for use of investors.
Abstract: A lot of research has been done to predict economic development. The problem studied here is about the stock prediction for use of investors. More specifically, the stock market's movements will be analyzed and predicted. We wish to retrieve knowledge that could guide investors on when to buy and sell.
Through a detailed case study on trading S&P 500 index, rough sets is shown to be an applicable and effective tool to achieve this goal. Some problems concerning time series transformation, indicator selection, trading system building in real implementation are also discussed.
144 citations
TL;DR: In this paper, the authors study the trading strategies of NYSE market participants through their choice of venue, order type and timing during the turbulent October 1997 period and find that the implicit costs of supplying liquidity through the electronic limit order book become so high as to induce market participants to withdraw depth from the book, opting instead for the flexibility and discretion of floor trading.
131 citations
TL;DR: The NCCR-Climate Reference REME-ARTICLE-2004-002 Record created on 2006-08-25, modified on 2017-11-27 as mentioned in this paper, was used in this paper.
Abstract: Keywords: NCCR-Climate Reference REME-ARTICLE-2004-002 Record created on 2006-08-25, modified on 2017-11-27
TL;DR: In this article, the authors investigate the market liquidity effects of the introduction of index tracking stocks for the Dow Jones Industrial Average (DIAMONDS) and the NASDAQ 100 index (Q's).
Abstract: We investigate the market liquidity effects of the introduction of index-tracking stocks for the Dow Jones Industrial Average (DIAMONDS) and the NASDAQ 100 index (Q's). Our main finding is liquidity of the underlying DJIA 30 index stocks improves after the introduction of the exchange-traded fund, largely because of a decline in the cost of informed trading. Further, we find the DIAMONDS has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks, again primarily because of lower adverse selection costs. Finally, we find weaker but qualitatively similar results for the Q's.
TL;DR: In this article, the authors explore the dynamics of the relation between institutional trading and stock returns and find that stock returns Granger-cause institutional trading on a quarterly basis, that is, institutions buy more popular stocks after market rises.
Abstract: In this study, we explore the dynamics of the relation between institutional trading and stock returns. We find that stock returns Granger-cause institutional trading (especially purchases) on a quarterly basis. The robust and significant causality from equity returns to institutional trading can be largely explained by the time-series variation of market returns, that is, institutions buy more popular stocks after market rises. Stock returns appear to be negatively related to lagged institutional trading. An analysis of the behavior of trading and the returns of the traded stocks reveals evidence that stocks with heavy institutional buying (selling) experience positive (negative) excess returns over the previous 12 months.
TL;DR: In this paper, the authors reviewed the evidence on the profitability of technical analysis and categorized the empirical literature into two groups, "early" and "modern" studies, according to the characteristics of testing procedures.
Abstract: The purpose of this report is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, "early" and "modern" studies, according to the characteristics of testing procedures. Early studies indicated that technical trading strategies were profitable in foreign exchange markets and futures markets, but not in stock markets before the 1980s. Modern studies indicated that technical trading strategies consistently generated economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 92 modern studies, 58 studies found positive results regarding technical trading strategies, while 24 studies obtained negative results. Ten studies indicated mixed results. Despite the positive evidence on the profitability of technical trading strategies, it appears that most empirical studies are subject to various problems in their testing procedures, e.g., data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.
TL;DR: In this paper, the authors examined insider trading in specialist and dealer markets, using the trades of stock brokers who had advance copies of a stock analysis column in Business Week magazine, and found that increases in price and volume occur after informed trades.
TL;DR: In this paper, a multivariate variance ratio using heteroscedastic robust bootstrap procedures was used to test whether returns for emerging stock markets are predictable, and the results showed that emerging equity indices do not resemble a random walk while for developed country indices (US and Japan) they are not able to reject this hypothesis.
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TL;DR: In this paper, the microstructure of the MTS Global Market bond trading system was studied and a variety of spread measures for di®erent classes of bond maturities and issuing countries were used to estimate the price impact of order-order order and control for the intraday trading intensity and the announcement of macroeconomic news.
Abstract: We study the microstructure of the MTS Global Market bond trading system. This system is the largest pan European interdealer trading system for Eurozone government bonds. Using a unique new dataset we study a variety of spread measures for di®erent classes of bond maturities and issuing countries. Wend that quoted and e®ective spreads are related to maturity and trading intensity. Securities can be traded on a domestic and a European (or EuroMTS) platform. We show that despite the apparent fragmentation of trading on domestic platforms and EuroMTS, the markets are closely connected in terms of liquidity. We then study the intrady price-order °ow relation in the Euro bond market. We estimate the price impact of order °ow and control for the intraday trading intensity and the announcement of macroeconomic news. The regression results show a larger impact of order °ows during announcement days and a positive relation between trading intensity and price impact. This indicates a higher price impact of a trade after a longer period of inactivity and the e®ect is even larger during days with important news announcements. We relate thesendings to interdealer trading and to the structure of European bond markets.
TL;DR: In this paper, the effect of index futures trading in the Korean markets on spot price volatility and market efficiency of the underlying KOSPI 200 stocks, relative to the carefully matched non-KOSPI200 stocks was examined.
Abstract: We examine the effect of the introduction of index futures trading in the Korean markets on spot price volatility and market efficiency of the underlying KOSPI 200 stocks, relative to the carefully matched non-KOSPI 200 stocks. Employing both an event study approach and a matching-sample approach for the market data during the period of January 1990–December 1998, we find that the introduction of KOSPI 200 index futures trading is associated with greater market efficiency but, at the same time, greater spot price volatility in the underlying stock market. We also find that KOSPI 200 stocks experience lower spot price volatility and higher trading efficiency than non-KOSPI 200 stocks after the introduction of futures trading. The trading efficiency gap between the two groups of stocks, however, declines over time and vanishes following the addition of options trading. Overall, our results suggest that while futures trading in Korea increases spot price volatility and market efficiency, there exists volatility spillover to stocks against which futures are not traded. We provide several factors unique in the Korean markets including circuit breakers, sidercar system, restrictions on foreign ownership, and inactive program trading as potential factors to explain some of our puzzling evidence. We further consider the potential effect of changes in daily price limits utilized by the Korea Stock Exchange during the testing period on our empirical findings. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1195–1228, 2004
TL;DR: In this paper, the distribution of trading volume across different venues after a company lists abroad was investigated, and it was shown that the ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies.
Abstract: We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Domestic trading increases around the cross-listing, and afterwards is negatively correlated with past foreign trading activity. This accords with the flow-back hypothesis that declining foreign trading is associated with the gravitational pull of the home market.
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TL;DR: The 2004 survey showed a surge in traditional foreign exchange trading, driven by momentum trading and carry trades in a global search for yield on the part of institutional investors and leveraged players as well as by hedging activity as discussed by the authors.
Abstract: The 2004 survey shows a surge in traditional foreign exchange trading. This seems to have been driven by momentum trading and carry trades in a global search for yield on the part of institutional investors and leveraged players as well as by hedging activity.
TL;DR: This article found that more stringent insider trading laws are associated with more dispersed equity ownership, greater stock price accuracy and greater stock market liquidity, controlling for various economic, legal and institutional factors.
Abstract: The primary goal of this Article is to bring empirical evidence to bear on the heretofore largely theoretical law and economics debate about insider trading. The Article first summarizes various agency, market, and contractual (or "Coasian") theories of insider trading propounded over the course of this longstanding debate. The Article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Exploiting the natural variation of international data, the Article finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock market liquidity, controlling for various economic, legal and institutional factors. These results cast doubt on pure "Coasian" theories of insider trading and suggest the appropriate locus of academic and policy inquiries about the efficiency implications of insider trading and its regulation. Further empirical research is necessary, however, in order conclusively to resolve the perennial insider trading debate.
TL;DR: In this article, the authors investigate price and trading behavior around several well-known stock market and commodity corners which occurred between 1863 and 1980 and find strong evidence that large investors and corporate insiders possess market power that allowed them to manipulate prices.
Abstract: Using a novel hand-collected data set we investigate price and trading behavior around several well-known stock market and commodity corners which occurred between 1863 and 1980. We find strong evidence that large investors and corporate insiders possess market power that allowed them to manipulate prices. Manipulation leading to a market corner tends to increase market volatility and has an adverse price impact on other assets. We also find that the presence of large investors makes it extremely risky for would-be short sellers to trade against the mispricing. Therefore, regulators and exchanges need to be concerned about ensuring that corners do not take place since they are accompanied by severe price distortions.
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08 Jan 2004
TL;DR: In this paper, the authors provide systems and methods for intra-day trading of AMETFs without requiring disclosure of the specific assets underlying the AMETF, and provide creation and redemption structures for AMETF shares.
Abstract: The invention provides systems and methods for intra-day trading of actively managed exchange traded funds (AMETFs). The invention provides creation and redemption structures for AMETF shares that allow arbitrage, intra-day value estimations for AMETF shares, and hedging portfolios for hedging risks associated with trading AMETF shares, all without requiring disclosure of the specific assets underlying the AMETF.
TL;DR: In this article, a simple trading rule based on this observation produces impressive gross returns when compared to a buy-and-hold strategy, which is positively related to subsequent ETF returns creating potential profit opportunities.
Abstract: Foreign exchange-traded funds (ETFs) trade on U.S. exchanges but provide broad exposure to foreign markets. ETFs are designed to minimize the deviation between price and value of the underlying securities. However, nonoverlapping trading hours between the United States and many foreign markets inhibit this mechanism. The data for Japan and Hong Kong iShares show that deviations exist between the ETF price and the value of the underlying securities. The deviations are positively related to subsequent ETF returns creating potential profit opportunities. A simple trading rule based on this observation produces impressive gross returns when compared to a buy-and-hold strategy.
TL;DR: In this article, the impact of trading in KOSPI 200 futures on the spot market was investigated and it was shown that futures trading increases the speed at which information is impounded into spot market prices, reduces the persistence of information and increases spot market volatility.
Abstract: This article investigates the impact on the spot market of trading in KOSPI 200 futures. Empirical results show that futures trading increases the speed at which information is impounded into spot market prices, reduces the persistence of information and increases spot market volatility. The spot and futures prices are cointegrated and there is bidirectional causality between the two markets. The lead-lag relation is asymmetric with weaker evidence that the spot index leads futures and stronger evidence that the stock index futures market leads the spot market.
Patent•
17 Apr 2004
TL;DR: In this paper, automated electronic trading is provided by the cooperation of various modules that generate trade orders and transmit the trade orders to the appropriate broker platform for execution of the trades, based on trade strategies and other settings determined by the trader or client or combination.
Abstract: Automated electronic trading is provided by the cooperation of various modules that generate trade orders and transmit the trade orders to the appropriate broker platform for execution of the trades. The trade orders are generated based on trade strategies and other settings that are determined by the trader or client or combination. These tools enable a client to set up automated trading based on trade orders generated remotely by a professional trader using a vendor module to manage multiple trading strategies and market data inputs.
TL;DR: This paper examined the relation between futures trading activity by trader type and returns over short horizons in five foreign currency futures markets and found that speculator sentiment is positively related to future returns in contrast, hedger sentiment covaries negatively with future returns.
Abstract: In this paper, we examine the relation between futures trading activity by trader type and returns over short horizons in five foreign currency futures markets – British pound, Canadian dollar, Deutsche mark, Japanese yen, and Swiss franc Transforming trading activity into a sentiment measure, we find that speculator sentiment is positively related to future returns In contrast, hedger sentiment covaries negatively with future returns We also find that extreme sentiment by trader type is more correlated with future market movements than moderate sentiment Our results suggest that hedgers lose to speculators in these futures markets, on average Based on equilibrium pricing models that futures risk premiums are determined by both market risk and hedging pressure, we show that the profits to speculators are in general compensation for bearing risk
TL;DR: In this paper, the authors introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers.
Abstract: We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar-yen trading. We study the effects of scheduled U.S.macroeconomic data releases, first confirming the finding of recent literature that the conditional mean of the exchange rate responds very quickly to the unexpected component of data releases. We next study the effects of data releases on trading volumes. News releases cause volume to rise, and to remain elevated for a longer period. However, in contrast to the result for the level of the exchange rate, even if the data release is entirely in line with expectations, we find that there is still typically a large pickup in trading volume.
TL;DR: This article used the standard contrarian portfolio approach to examine short-horizon return predictability in 24 US futures markets and found strong evidence of weekly return reversals, similar to the findings from equity market studies.
Abstract: We use the standard contrarian portfolio approach to examine short-horizon return predictability in 24 US futures markets. We find strong evidence of weekly return reversals, similar to the findings from equity market studies. When interacting between past returns and lagged changes in trading activity (volume and/or open interest), we find that the profits to contrarian portfolio strategies are, on average, positively associated with lagged changes in trading volume, but negatively related to lagged changes in open interest. We also show that futures return predictability is more pronounced if interacting between past returns and lagged changes in both volume and open interest. Our results suggest that futures market overreaction exists, and both past prices and trading activity contain useful information about future market movements. These findings have implications for futures market efficiency and are useful for futures market participants, particularly commodity pool operators.
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TL;DR: In this article, the authors investigate the performance of call markets at the open and close from a unique natural experiment provided by the institutional structure of the London Stock Exchange, where there is a parallel ¶off-exchange¶ dealership system at both the market's open and closed.
Abstract: Various markets, particularly NASDAQ, have been under pressure from regulators and market participants to introduce call auctions for their opening and closing periods. We investigate the performance of call markets at the open and close from a unique natural experiment provided by the institutional structure of the London Stock Exchange. As well as a call auction, there is a parallel ¶off-exchange¶ dealership system at both the market's open and close. Although the call market dominates the dealership system in terms of price discovery, we find that the call suffers from a high failure rate to open and close trading, especially on days characterized by difficult trading conditions. In particular, the call's trading costs increase significantly when (a) asymmetric information is high, (b) trading is expected to be slow, (c) order flow is unbalanced, and (d) uncertainty is high. Furthermore, traders' resort to call auctions is negatively correlated with firm size, implying that the call auction is not the optimal method for opening and closing trading of medium and small sized stocks. We suggest that these results can be explained by thick market externalities.