Aggressive Trading Research Articles

Call auction frequency and market quality: Evidence from the Taiwan Stock Exchange

Financial market quality is generally assessed with respect to efficiency, liquidity, and stability. The frequency of trading contributes to these attributes. The Taiwan Stock Exchange uses a periodic call auction as its main trading mechanism. From 2010 to 2014 the call auction interval was reduced four times, from 25 to 5 s, providing a natural experiment to test the impact on market quality. Using multiple measures of efficiency, liquidity, and stability we provide evidence that the reductions in call auction interval have improved overall market quality. We find that higher auction frequencies are associated with a lower trade-to-auction ratio and less aggressive trading behaviour. The evidence suggests that there are more gains to be made through further reduction in the call auction interval to around 2 s.

Is There a Magnet Effect of Rule-Based Circuit Breakers in Times of High-Frequency Trading?

This paper studies whether rule-based circuit breakers in the form of short-lived volatility interruptions exhibit a magnet effect in times of high-frequency trading. Based on a sample of 3,271 volatility interruptions on two major European venues, we analyze whether trading aggressiveness, trading activity, and volatility accelerate close to volatility interruptions indicating a magnet effect. Although the duration of the interruptions is meaningful given today's high-frequent securities markets, we do not find any evidence for a magnet effect. Rather, our results show that trading aggressiveness, trading activity, and volatility gradually slow down towards the triggering threshold and that price changes even revert in case of downward-triggered interruptions. These findings hold both for different levels of high-frequency trading activity and for disclosed and undisclosed price limits triggering the circuit breaker.

When Less Is More: Passive Volume Algos for Enhanced Performance

Large aggressive orders in the market often trigger, in turn, aggressive trades from Standard Volume algos. This phenomenon leads to late aggressive trading, which is particularly predictable and detrimental to execution performance. This hard-wired feature is rarely overcome, although it could be solved simply by changing “Standard Volume” indexing to “Passive Volume” indexing. Passive volume is defined as the volume traded passively, according to the size of the transaction. According to the authors’ simulations, performances improve markedly when a Passive Volume algo is used, versus the Arrival Price as well as versus VWAP. Passive Volume algos would then be a particularly advisable alternative to Standard Volume algos on large-caps, especially for participation rates below 15% and expected trading durations longer or equivalent to 60 minutes. The same can be said for durations above 90 minutes on mid-caps.

Can earnings fixated investors survive in a competitive securities market? Implications for sustained price anomalies and mark-to-market accounting

We model the dynamic survival of earnings fixated investors in a competitive securities market that allows for learning and arbitrage and that is populated by heterogeneous investors. Our model is distinct from those based on aggressive trading by overconfident investors. We prove that in the absence of noise traders, rational investors will drive out earnings fixated investors from the market in the long-run. More interestingly, we show that in a market with noise traders, some proportion of earnings fixated investors survive in long-run equilibrium for all feasible model parameter values. Furthermore, under no circumstances can the earnings fixated investors be driven out of the market completely. On the contrary, for some parameter values, the earnings fixated investors drive out the rational investors entirely. These results rationalize the long-run sustainability of common pricing anomalies. They also highlight potential benefits to society of mark-to-market accounting.

Operating performance and aggressive trade credit policies

Abstract We examine the operating performance improvements associated with the extension of trade credit. Our results suggest a positive and significant relation between future profitability and contemporaneous trade credit provision. Further findings indicate significantly higher margins, revenues and market shares for firms that extend more trade credit than industry competitors with similar characteristics, operational necessities and financial distress levels. These inferences are robust to several econometric concerns such as the joint determination of trade credit extension and firm performance. Overall, our results imply that aggressive trade credit policies can provide firm management with a unique channel to improve product market performance.

Trends of U.S.-China Trade Disputes and Beijing’s Policy Options

Although the intensified trade disputes between China and the United States accord with the basic theory of international political economy, they are unlikely to escalate into a trade war in a world characterized by the inexorable forces of globalization. What lies behind the Trump administration’s aggressive trade policy toward China is a bipartisan consensus on the growing need to reduce U.S. trade deficits, rein in China’s non-market economic forces, slow down China’s technological innovation and industrial upgrading, as well as to create political pressure on China to rectify its allegedly malign practices in global economic arenas. Motivation analysis suggests that the ongoing trade disputes are a product of the United States trying to coerce a potential challenger into adjusting its industrial development strategy and to prevent a determined rising power from pursuing national revival on its own terms. Lessons drawn from the trade conflicts between Japan and the United States in the 1980s suggest that Beijing may encounter even more trade frictions with Washington in the next few years. China must stand its ground under growing political and economic pressure, define trade disputes in strictly economic terms, and deal flexibly with their impacts. The lasting trade tensions between China and the United States has also exposed Beijing’s strategic shortcomings and forced China to enhance its innovation capacity while fostering independent intellectual property, so as to consolidate its comprehensive national power.

Trader Positions and Marketwide Liquidity Demand

In electronic, liquid markets, traders frequently change their positions. The distribution of these trader position changes carries important information about liquidity demand in the market. From this distribution of trader position-changes, we construct a marketwide measure for intraday liquidity demand that does not necessarily depend on aggressive trading. Using a rich regulatory dataset on S&P 500 E-mini futures and 10-year Treasury futures markets, we show that this liquidity demand measure has a positive impact on prices. We then decompose our measure of liquidity demand into three components: aggressive, passive and mixed liquidity demand. Passive liquidity demand also has an impact on prices; a one standard deviation increase in passive liquidity demand is associated with 0.5 tick rise in prices for S&P 500 E-mini futures. In addition, we find that new information is incorporated into the prices when passive liquidity demanders take positions. By providing direct evidence, we contribute to the growing literature on the impact of passive limit orders.

Market reaction to open innovation announcements

PurposeOpen innovation is of crucial importance for all companies operating in the economics of widely distributed knowledge. However, the effects of its disclosure remain largely uncharted in the case of service companies. Therefore, the purpose of this paper is to measure the impact of open innovation announcements on the market value (MV) of service enterprises.Design/methodology/approachThe research covered 398 open innovation announcements released by service companies. It was conducted in the whole of the European Union in the period February 2011-December 2016. The data were analysed in the short and long term with the use of event-study and buy-and-hold methods.FindingsThe results indicated the significant positive effect of open innovation disclosure in both short and long term. At the same time, the market was not able to immediately fully value the information in the short run and tended to overestimate the positive effect of the innovation announced. No significant leakage and dissemination effects were observed prior to the announcement. There was no significant difference in the magnitude of positive and negative reactions to the releases.Practical implicationsFrom the point of view of business practice the research proved the benefits of information disclosure and supported the long-term planning. From the investors’ viewpoint, it signalled the small risk of significant fluctuations resulting from aggressive trading prior to the announcement and unwinding part of the acquired position afterwards.Originality/valueThe paper attempts to fulfil the research gap on the impact of the announcements on open innovation on the MV of companies.

Informed trading by foreign institutional investors as a constraint on tunneling: Evidence from China

AbstractManuscript TypeEmpiricalResearch Question/IssueThis paper investigates how the trading activities of foreign institutional investors (FIIs) affect the tunneling activities of controlling shareholders in an emerging economy (China).Research Findings/InsightsWe use an unbalanced panel dataset of 167 FIIs with investments in Chinese real estate firms during the period 2003 to 2011, which gives us 1006 firm‐year observations in total. We find strong support for our hypothesis of an inverted U‐shaped relationship between FII trading turnover and the extent of tunneling by controlling shareholders.Theoretical/Academic ImplicationsIn many emerging economies, the institutional environment for investor protection is weak. Powerful controlling shareholders may take the opportunity to extract private benefits via tunneling activities to the detriment of minority shareholders, and informed minority investors may also take advantage of less well‐informed investors. There are thus multiple principal–principal agency conflicts. FIIs are a particularly important group of informed investors. On the one hand, large‐scale aggressive trading by FIIs should drive stock prices to fundamentals, provide market discipline to management, and thus limit tunneling. On the other hand, FIIs may opt to exploit their private knowledge to gain trading profits at the expense of uninformed investors, and implicitly support tunneling. We highlight these potential effects, and demonstrate empirically an inverted U‐shaped relationship between FII trading turnover and the extent of tunneling.Practitioner/Policy ImplicationsTunneling is a serious issue, particularly in emerging economies where the institutional arrangements for minority investor protection are often weak. FII involvement may enhance market discipline, but may also exacerbate the problem, so policymakers need to guard against potential adverse effects. An ownership cap on FII shareholdings is unlikely to be effective, but policymakers might strengthen QFII license revocation policies and issue more licenses to promote competition among FIIs.

When Less is More: Passive Volume Algos for Enhanced Performance

Standard Volume algos induce predictable aggressive trades. Large aggressive orders in the market often trigger, in turn, aggressive trades from Standard Volume algos. This phenomenon leads to late aggressive trading, which is particularly predictable and detrimental to execution performance. In contrast, Passive Volume indexing strongly reduces the proportion of aggressive orders. Passive Volume liquidity consistency increases with time. With time, trading imbalances normalise, and the passive volume share becomes steadier. This makes Passive Volume indexing practical for trades with durations above 60 minutes on large caps. Passive Volume algos outperform standard ones by 0.2 spreads. According to our simulations, performances improve markedly when a Passive Volume algo is used, versus Arrival Price as well as versus VWAP. Passive Volume algos are a particularly advisable alternative to using Standard Volume algos on large caps, especially for a participation rate below 15\% and expected trading durations longer or equivalent to 60 minutes. The same can be said for durations above 90 minutes on mid caps.

Trump's China Trade Policies: Threats and Constraints

United States litigation against China in the WTO will be ground zero for the new Trump administration’s aggressive trade policy. Five important facts must be highlighted to better understand the likely actions of the Trump administration. First, heightened judicial advocacy within the WTO will be consistent with both the Bush and Obama administrations’ aggressive use of the WTO’s dispute settlement system. Second, international judicial activism is squarely within the context of unfolding historical changes in international relations. Third, China hawks in the Trump administration will be competing with a number of countervailing forces in the White House, throughout the administration, and in the federal courts. Fourth, the U.S. Congress has the exclusive authority to regulate global trade. However, much of this exclusive authority has been delegated to the president. Fifth, Trump considers trade as a zero-sum transaction, with a focus on the bottom line, to the exclusion of all else.

Trump's China Trade Policies: Threats and Constraints

United States litigation against China in the WTO will be ground zero for the new Trump administration’s aggressive trade policy. Five important facts must be highlighted to better understand the likely actions of the Trump administration. First, heightened judicial advocacy within the WTO will be consistent with both the Bush and Obama administrations’ aggressive use of the WTO’s dispute settlement system. Second, international judicial activism is squarely within the context of unfolding historical changes in international relations. Third, China hawks in the Trump administration will be competing with a number of countervailing forces in the White House, throughout the administration, and in the federal courts. Fourth, the U.S. Congress has the exclusive authority to regulate global trade. However, much of this exclusive authority has been delegated to the president. Fifth, Trump considers trade as a zero-sum transaction, with a focus on the bottom line, to the exclusion of all else.

SEC Rule 10b5-1 Plans and Strategic Trade around Earnings Announcements

We examine how corporate insiders profit from private information about future earnings performance through SEC Rule 10b5-1 trading plans. We first provide evidence consistent with insiders using 10b5-1 plans to sell stock in advance of disappointing earnings results. We then examine insiders who not only currently use 10b5-1 plans, but also actively traded their own company’s stock prior to the availability of such plans. We find that this group traded aggressively on earnings information prior to 10b5-1, but then shifted their aggressive trading into 10b5-1 plans after the availability of planned trading. We also document several questionable patterns associated with their trading behavior. Namely, their trades tend to be irregularly timed, close to the plan initiation date, infrequent in nature, and executed during traditional earnings blackout periods. In terms of firm characteristics, these insiders are more likely to be employed at firms with weaker firm governance and lower institutional ownership.

Directional Trading across Stock Limit Order Book and Options Markets

A perennial question about derivatives trading is whether “causality,” meaning price changes due to new information flowing into the market, run primarily from the underlying to the derivatives market or from the derivatives to the underlying. The typical methodology in addressing this issue is to test whether price changes in one market “Granger cause” a response in the other market. In this article, Wang brings in a new measure to explore causality between a stock and its options. He looks at whether “aggressiveness” in the placement of orders in the stock limit order book leads to aggressive trades in the options market (at prices inside the bid–ask spread but close to one end), or vice versa. It is of interest and some importance that causality is found to run in both directions. The degree of the effect is found to vary according to the time of day, the width of bid–ask spreads, and option moneyness.

To Cross or Not to Cross the Spread: That Is the Question

Traders have always empirically estimated the short-term dynamic of the market. Contrary to popular belief, building a quantitative estimate of the next trade is not some sort of “Holy Grail” only accessible to the darkest high-frequency traders. In fact, this knowledge is easily understandable by anyone who observes the data attentively. Thanks to our tick database, we find that order book imbalances allow us to make reliable forecasts regarding the side (bid/ask) of the next trade; in short, on average, aggressive trades will mainly target the smallest limit (in size). We also find that aggressive trades will consume a larger share when the smaller limit is hit rather than the larger limit. Using this insight regarding the next trade enables us to estimate the risk induced by a passive posting and thereby helps to decide whether or not to cross the spread using objective criteria based on the Sharpe ratio. Similar rules can be applied to trading algorithms to help eliminate many unnecessary aggressive trades and thus significantly increase trading performances. <b>TOPICS:</b>Statistical methods, risk management

A Better Way to Trade Small Caps: The Power of Volume Volatility in Algorithm Design

The goal of this research was to study methods of altering the standard approach to volume weighted average price such that it respects stock-specific volume volatility. The early returns are promising, and we think this concept can be applied to other algorithms where inappropriately tight constraints create excess cost. In this article, we review the state of the art for volume forecasting and how these efforts are rewarded. We show the results of a random trial of orders that use a static tolerance around the target schedule versus orders that use a tolerance set by the volume volatility of the stock. The results show less aggressive trading. We also argue that traders should not choose algorithms based on stock characteristics. Instead, algorithm choice should focus on the tradeoff between cost and timing risk. <b>TOPICS:</b>Statistical methods, volatility measures

Price discovery and the cross-section of high-frequency trading

We quantify the price discovery contributions of high-frequency traders (HFTs) in the United Kingdom equity market and examine how it varies in their cross-section. For this, we group individual HFTs according to their liquidity taking/making activity. HFTs contribute about 14% of all trade-induced information, with aggressive HFTs accounting for two-thirds of this contribution. This suggests that HFTs who pursue strategies that require the use of aggressive trades are most informed, as opposed to passive HFTs who more likely act as market-makers. However, information shares decline with the amount of aggressive volume, suggesting that these trading strategies are not scalable.

Analyzing Trade Liberalization Effect in the Egg Sector Using a Dynamic Gravity Model

This study analyzes the effects of different liberalization scenarios in the international trade of eggs and egg products. We use a dynamic gravity model that takes into account the observed persistence of trading partners. The estimated parameters of the gravity model serve to quantify the impact of various liberalization scenarios on the probability of importing (extensive margin) and on trade volumes (intensive margin). The results indicate that even in the context of aggressive trade liberalization, trade gains at the extensive margin will be modest. Gains at the intensive margin of trade are present even in the context of partial liberalization - Doha type - of trade.

Insider Trading and Sentiment Trading

This paper studies strategic insider trading in continuous time when sentiment traders are present in the securities market. In equilibrium, we characterize both the insider's trading strategy and the market maker's pricing rule. We find that both the insider's trading aggressiveness and the insider's unconditional expected profits are decreasing in the informational content of sentiment trading. The impact of the sentiment traders' trading activity is reported to be non-monotonic. We identify securities markets in which the sentiment traders' trading activity increases or decreases both the insider's trading aggressiveness and the insider's expected profits, respectively. The securities market's liquidity is found to be independent of the informativeness of sentiment trading. But, the depth of the securities market increases in the sentiment traders' trading activity. Finally, sentiment trading does not affect the price discovery process adversely. We conclude that sentiment trading does not impose any negative externality to the securities market at all. Caring about market quality, regulators should not be worried about sentiment trading at all.

Order Aggressiveness, Price Impact, and Investment Performance in a Pure Order‐Driven Stock Market

AbstractThis study provides an order‐level angle, which is more directly mapped to traders’ initial trading requirement, to investigate the relationship between order aggressiveness, price impact, and investment performance. Our results reveal several findings. First, dealers exhibit the most aggressive trading behavior. Second, traders’ order aggressiveness is affected by market conditions. Third, mutual funds and foreign investors apparently influence transitory price movements through their direct buying behavior, rather than their order aggressiveness. Fourth, foreign investors’ aggressive buy orders perform better than other traders in both bearish and bullish markets. Fifth mutual funds’ aggressive selling is related to informed trading.