Algorithmic trading

About: Algorithmic trading is a research topic. Over the lifetime, 6718 publications have been published within this topic receiving 162209 citations. The topic is also known as: algotrading & Algorithmic trading.

Institutional Design and Liquidity at Stock Exchanges around the World

Abstract: The paper investigates the trading mechanism and other structural features of 51 stock exchanges and analyzes the impact of these institutional characteristics on liquidity measures such as closing bid-ask spreads, volatility and trading turnover. Exchange-design features such as narrower tick sizes, designated market makers, consolidated limit order books, hybrid trading mechanisms, automated trade execution, consolidated order-flow, and better shareholder rights are associated with lower spreads. These features also influence volatility and trading turnover, which in turn further affect spreads. Overall liquidity is highest on hybrid trading mechanisms compared to pure limit order books or quote-based dealer system because the former have two sources of liquidity. These results have important implications for investors' trading strategy, firms' listing strategy, and exchanges' organizational strategy.

Are Pairs Trading Profits Robust to Trading Costs

Abstract: We examine the impact of trading costs on pairs trading profitability in the US equity market over the period 1963-2009. After controlling for commissions, market impact and short selling fees; we find that pairs trading remains profitable, albeit at much more modest levels. Specifically, we document a risk-adjusted return of about 30 basis points (bps) per month amongst portfolios of well matched pairs that are formed within refined industry groups. Strategies that are implemented on the top 30% largest stocks produce an average alpha of 24 bps per month. Pairs trading exhibits a lower risk and lower return profile than a short-term reversal strategy that sorts stocks relative to their industry peers. Notably, both of these forms of contrarian investing are largely unprofitable in the period post 2002.

The CRISMA trading system: Who says technical analysis can't beat the market?

Abstract: M any people claim to use technical trading rules capableof ”beating the market.” Most academicians and even some members of the financial community doubt the usefulness of such rules, pointing to the repeated failures of simple price-based filters to withstand the rigors of scientific study as evidence. ’ Recent work, however, suggests that there may be more to some technical analysis than meets the eye. Epps (1975) and Smirlock and Starks (1985) suggest that there is a positive correlation between the absolute value of price changes in the market and changes in transaction volume. In a similar article, Rogalski (1978) states that a knowledge of both prices and transaction volume information may be more valuable in predicting future stock movements than prices alone. Bohan (1981) and Brush (1986) scientifically examine the usefulness of relative strength indicators and document a considerable degree of price persistence. Indeed, Brush concludes that relative strength “may be a legitimate contender for inclusion in multi-component equity ranking strategies.” This study attempts to directly determine the profitability performance of a multi-component technical trading system incorporating price, volume, and relative strength indicators on individual security is55

Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market

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.