Pub Date : 2015-12-31DOI: 10.3905/jot.2016.11.1.053
Onem Ozocak
The goal of this article is to examine whether profit opportunities exist after days with abnormal volume in the U.S. Treasury market when the market is under stress and market makers are reluctant to take risks. The evidence from the trading strategy used implies that morning and overnight returns are positively related and that profits are positive and highly significantly different from zero following days with abnormal volume. This article finds that when the two-year notes’ volume is used in the trading strategy of other securities, profits increase with maturity and improve for all maturities.
{"title":"Profit Opportunities in the U.S. Treasury Market When the Market Is Under Stress","authors":"Onem Ozocak","doi":"10.3905/jot.2016.11.1.053","DOIUrl":"https://doi.org/10.3905/jot.2016.11.1.053","url":null,"abstract":"The goal of this article is to examine whether profit opportunities exist after days with abnormal volume in the U.S. Treasury market when the market is under stress and market makers are reluctant to take risks. The evidence from the trading strategy used implies that morning and overnight returns are positively related and that profits are positive and highly significantly different from zero following days with abnormal volume. This article finds that when the two-year notes’ volume is used in the trading strategy of other securities, profits increase with maturity and improve for all maturities.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"81 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121674911","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-12-31DOI: 10.3905/jot.2016.11.1.006
Mo Chaudhury
This article argues that the 2009 Basel II market risk Value at Risk (VaR), which adds a stress VaR component, is overly conservative and that it is the failure to model extreme surges in volatility rather than any restrictions imposed by the VaR framework or the normality assumption that caused capital inadequacy during the financial crisis. This hypothesis is supported by comparing the pre-2009 VaR and the new 2009 VaR of Basel II and Extended Value at Risk (EVaR) for the S&P 500. EVaR is based on a market responsive composite volatility measure developed in this article and the popular normal distribution.
{"title":"Why Basel II Market Risk VaR is Too Conservative","authors":"Mo Chaudhury","doi":"10.3905/jot.2016.11.1.006","DOIUrl":"https://doi.org/10.3905/jot.2016.11.1.006","url":null,"abstract":"This article argues that the 2009 Basel II market risk Value at Risk (VaR), which adds a stress VaR component, is overly conservative and that it is the failure to model extreme surges in volatility rather than any restrictions imposed by the VaR framework or the normality assumption that caused capital inadequacy during the financial crisis. This hypothesis is supported by comparing the pre-2009 VaR and the new 2009 VaR of Basel II and Extended Value at Risk (EVaR) for the S&P 500. EVaR is based on a market responsive composite volatility measure developed in this article and the popular normal distribution.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"55 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126932117","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-12-31DOI: 10.3905/jot.2016.11.1.076
J. Schmitt
Best execution is one of the most actively discussed topics in market structure. Despite all the attention and concern this topic garners, it is surprising to see that some marketplaces continue to deliver new services that further impede quality of execution. An interesting example of this is the speed bump that the TMX introduced on one of its trading platforms–TMX Alpha–in September 2015. This speed bump was created in response to a speed bump introduced by the Aequitas NEO Exchange, but as will be demonstrated in this article, not all speed bumps are created equal.
{"title":"The Ultimate Best Execution Conflict of Interest? A Speed Bump Designed to Enable Predatory High-Frequency Trading","authors":"J. Schmitt","doi":"10.3905/jot.2016.11.1.076","DOIUrl":"https://doi.org/10.3905/jot.2016.11.1.076","url":null,"abstract":"Best execution is one of the most actively discussed topics in market structure. Despite all the attention and concern this topic garners, it is surprising to see that some marketplaces continue to deliver new services that further impede quality of execution. An interesting example of this is the speed bump that the TMX introduced on one of its trading platforms–TMX Alpha–in September 2015. This speed bump was created in response to a speed bump introduced by the Aequitas NEO Exchange, but as will be demonstrated in this article, not all speed bumps are created equal.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129614701","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-12-31DOI: 10.3905/jot.2016.11.1.068
A. Schmidt
Impact of trading in the multi-dealer spot foreign exchange market is described using a structural vector autoregressive model. The model is derived in terms of return, signed trading volume, signed order book volume, and signed insidemarket order flow. EUR/USD and EUR/JPY data samples with whole-pip pricing and decimal pip-pricing are used. The results show that market impact is determined primarily by the signed trading volume and decays on the 10-second time scale. Signed inside-market order flow may be important for currency pairs with wide bid/offer spreads. Two subtle effects, the limit order book’s push and pull, are described.
{"title":"Impact of Trading in the Multi-Dealer Spot Foreign Exchange","authors":"A. Schmidt","doi":"10.3905/jot.2016.11.1.068","DOIUrl":"https://doi.org/10.3905/jot.2016.11.1.068","url":null,"abstract":"Impact of trading in the multi-dealer spot foreign exchange market is described using a structural vector autoregressive model. The model is derived in terms of return, signed trading volume, signed order book volume, and signed insidemarket order flow. EUR/USD and EUR/JPY data samples with whole-pip pricing and decimal pip-pricing are used. The results show that market impact is determined primarily by the signed trading volume and decays on the 10-second time scale. Signed inside-market order flow may be important for currency pairs with wide bid/offer spreads. Two subtle effects, the limit order book’s push and pull, are described.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123834189","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-12-31DOI: 10.3905/jot.2016.11.1.081
Xin Che, Bonnie F. Van Ness, R. Van Ness
Venture exchanges are currently perceived by the U.S. Securities and Exchange Commission as a possible solution to the liquidity problem of small-cap stocks. This article assesses liquidity on the NYSE MKT, a market for small-cap stocks. We find that both the quoted spread and the relative quoted spread of the stocks listed on the NYSE MKT are higher than their matched peers on the NYSE. Compared with NASDAQ stocks, we find that the NYSE MKT stocks have a higher quoted spread but a lower relative quoted spread. Our event study shows that when stocks switch their listing from the NYSE MKT to the NYSE, they experience a liquidity improvement in terms of the quoted spread and relative quoted spread. However, the evidence on the liquidity changes when stocks switch to NASDAQ is mixed.
{"title":"The Market for Small-Cap Stocks (NYSE MKT)","authors":"Xin Che, Bonnie F. Van Ness, R. Van Ness","doi":"10.3905/jot.2016.11.1.081","DOIUrl":"https://doi.org/10.3905/jot.2016.11.1.081","url":null,"abstract":"Venture exchanges are currently perceived by the U.S. Securities and Exchange Commission as a possible solution to the liquidity problem of small-cap stocks. This article assesses liquidity on the NYSE MKT, a market for small-cap stocks. We find that both the quoted spread and the relative quoted spread of the stocks listed on the NYSE MKT are higher than their matched peers on the NYSE. Compared with NASDAQ stocks, we find that the NYSE MKT stocks have a higher quoted spread but a lower relative quoted spread. Our event study shows that when stocks switch their listing from the NYSE MKT to the NYSE, they experience a liquidity improvement in terms of the quoted spread and relative quoted spread. However, the evidence on the liquidity changes when stocks switch to NASDAQ is mixed.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131763147","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-09-30DOI: 10.3905/jot.2015.10.4.024
D. Stocken, A. McCauley
The two competing Australian stock exchanges have an extremely high and growing percentage of their trading volumes being transacted from within their own competing dark pool matching services. In this article, the authors determine the exchange dark pool participation rate (EDPPR) in 50 of the largest Australian stocks by market capitalization during a three-month period (October 2014 through December 2014). The hypothesis is that the higher the stock price is, the lower the EDPPR will be.
{"title":"Top 50 Australian Stocks’ Exchange Dark Pool Participation Rate","authors":"D. Stocken, A. McCauley","doi":"10.3905/jot.2015.10.4.024","DOIUrl":"https://doi.org/10.3905/jot.2015.10.4.024","url":null,"abstract":"The two competing Australian stock exchanges have an extremely high and growing percentage of their trading volumes being transacted from within their own competing dark pool matching services. In this article, the authors determine the exchange dark pool participation rate (EDPPR) in 50 of the largest Australian stocks by market capitalization during a three-month period (October 2014 through December 2014). The hypothesis is that the higher the stock price is, the lower the EDPPR will be.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127079240","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-09-30DOI: 10.3905/jot.2015.10.4.001
Brian R. Bruce
{"title":"Editor’s Letter","authors":"Brian R. Bruce","doi":"10.3905/jot.2015.10.4.001","DOIUrl":"https://doi.org/10.3905/jot.2015.10.4.001","url":null,"abstract":"","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"159 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114241493","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-09-30DOI: 10.3905/jot.2015.10.4.005
Dror Parnes
This study presents several insightful performance measurements for machine-learning trading systems. Machine-learning trading platforms are presumed to operate in a continuous time domain, whereas their learning configurations prompt recurring yet bounded improvements over time. The study provides practical estimation guidelines for the relevant parameters and further illustrates the functionality of the proposed scheme through some conjectural examples. The recommended performance measurements aim to help internal auditors of trading departments and regulatory institutions to better track errors at these automated systems.
{"title":"Performance Measurements for Machine-Learning Trading Systems","authors":"Dror Parnes","doi":"10.3905/jot.2015.10.4.005","DOIUrl":"https://doi.org/10.3905/jot.2015.10.4.005","url":null,"abstract":"This study presents several insightful performance measurements for machine-learning trading systems. Machine-learning trading platforms are presumed to operate in a continuous time domain, whereas their learning configurations prompt recurring yet bounded improvements over time. The study provides practical estimation guidelines for the relevant parameters and further illustrates the functionality of the proposed scheme through some conjectural examples. The recommended performance measurements aim to help internal auditors of trading departments and regulatory institutions to better track errors at these automated systems.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"241 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133480195","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-09-30DOI: 10.3905/jot.2015.10.4.029
Ian Domowitz, Kristi Reitnauer, Colleen Ruane
The authors address a single question in this article: Is consideration of trading strategy an essential component in assessing venue performance? The answer is yes. They arrive at this conclusion through comparisons of strategy use across venues and performance metrics, by venue, venue type, and strategy.
{"title":"Garbage In, Garbage Out: An Optical Tour of the Role of Strategy in Venue Analysis","authors":"Ian Domowitz, Kristi Reitnauer, Colleen Ruane","doi":"10.3905/jot.2015.10.4.029","DOIUrl":"https://doi.org/10.3905/jot.2015.10.4.029","url":null,"abstract":"The authors address a single question in this article: Is consideration of trading strategy an essential component in assessing venue performance? The answer is yes. They arrive at this conclusion through comparisons of strategy use across venues and performance metrics, by venue, venue type, and strategy.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"160 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132495756","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2015-09-30DOI: 10.3905/jot.2015.10.4.040
Asli Ascioglu, R. Holowczak, David Louton, Hakan Saraoglu
The equity options market has shown rapid growth and the competition among different options exchanges and trading platforms has intensified in recent years. As growth and competition in the U.S. options market continues, it becomes increasingly important for market participants to evaluate market quality in different options trading venues. A sound comparison of market quality among the competing trading markets requires a clear understanding of their specific market structures, since each venue attempts to differentiate itself with a unique value proposition. This article provides a review of the market microstructures of the major options exchanges and trading platforms in the United States. Using a sample period around the entry of the NASDAQ Options Market and the BATS Options Exchange, it analyzes the competition for trading volume in the options industry, investigates the characteristics of trades and execution costs in the major options exchanges and trading platforms, and examines the determinants of execution location for trades. It shows that during the first three months of their operations, the NASDAQ Options Market and BATS Options Exchange do not make a big impact on the trading volumes of the other options exchanges. It also finds that the NASDAQ Options Market has the smallest quoted spread and effective spread values for equity options among the seven exchanges during the first three months of its market entry. The BATS Options Exchange shows lower average trade size and average dollar trade size, and does not demonstrate competitive execution quality indicators or competitive execution costs in the earlier months of its operation. A probit analysis confirms that in spite of the increasingly complex and nuanced nature of options exchange competition, the main factors determining execution location for new market entrants are: i) posting quotes at the NBBO; and ii) being alone at the NBBO.
{"title":"Competition and Innovation in Option-Market Models","authors":"Asli Ascioglu, R. Holowczak, David Louton, Hakan Saraoglu","doi":"10.3905/jot.2015.10.4.040","DOIUrl":"https://doi.org/10.3905/jot.2015.10.4.040","url":null,"abstract":"The equity options market has shown rapid growth and the competition among different options exchanges and trading platforms has intensified in recent years. As growth and competition in the U.S. options market continues, it becomes increasingly important for market participants to evaluate market quality in different options trading venues. A sound comparison of market quality among the competing trading markets requires a clear understanding of their specific market structures, since each venue attempts to differentiate itself with a unique value proposition. This article provides a review of the market microstructures of the major options exchanges and trading platforms in the United States. Using a sample period around the entry of the NASDAQ Options Market and the BATS Options Exchange, it analyzes the competition for trading volume in the options industry, investigates the characteristics of trades and execution costs in the major options exchanges and trading platforms, and examines the determinants of execution location for trades. It shows that during the first three months of their operations, the NASDAQ Options Market and BATS Options Exchange do not make a big impact on the trading volumes of the other options exchanges. It also finds that the NASDAQ Options Market has the smallest quoted spread and effective spread values for equity options among the seven exchanges during the first three months of its market entry. The BATS Options Exchange shows lower average trade size and average dollar trade size, and does not demonstrate competitive execution quality indicators or competitive execution costs in the earlier months of its operation. A probit analysis confirms that in spite of the increasingly complex and nuanced nature of options exchange competition, the main factors determining execution location for new market entrants are: i) posting quotes at the NBBO; and ii) being alone at the NBBO.","PeriodicalId":254660,"journal":{"name":"The Journal of Trading","volume":"2007 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130645094","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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