The High-F requeny T rading Arms Rae: F requent Bath - PowerPoint PPT Presentation

The High-F requen y T rading Arms Ra e: F requent Bat h Au tions as a Ma rk et Design Resp onse Eri Budish, P eter Cramton and John Shim Sp ring 2014 Q-Group Semina r 8 Ap ril 2014

❚❤❡ ❍❋❚ ❆r♠s ❘❛❝❡✿ ❊①❛♠♣❧❡ ◮ ■♥ ✷✵✶✵✱ ❙♣r❡❛❞ ◆❡t✇♦r❦s ✐♥✈❡sts ✩✸✵✵♠♠ t♦ ❞✐❣ ❛ ❤✐❣❤✲s♣❡❡❞ ✜❜❡r ♦♣t✐❝ ❝❛❜❧❡ ❢r♦♠ ◆❨❈ t♦ ❈❤✐❝❛❣♦✳ ◮ ❙❤❛✈❡s r♦✉♥❞✲tr✐♣ ❞❛t❛ tr❛♥s♠✐ss✐♦♥ t✐♠❡ ✳ ✳ ✳ ❢r♦♠ ✶✻♠s t♦ ✶✸♠s✳ ◮ ■♥❞✉str② ♦❜s❡r✈❡rs✿ ✸♠s ✐s ❛♥ ✏❡t❡r♥✐t②✑✳ ◮ ❏♦❦❡ ❛t t❤❡ t✐♠❡✿ ♥❡①t ✐♥♥♦✈❛t✐♦♥ ✇✐❧❧ ❜❡ t♦ ❞✐❣ ❛ t✉♥♥❡❧✱ ✏❛✈♦✐❞✐♥❣ t❤❡ ♣❧❛♥❡t✬s ♣❡s❦② ❝✉r✈❛t✉r❡✑✳ ◮ ❏♦❦❡ ✐s♥✬t t❤❛t ❢✉♥♥② ✳ ✳ ✳ ❙♣r❡❛❞✬s ❝❛❜❧❡ ✐s ❛❧r❡❛❞② ♦❜s♦❧❡t❡✦ ◮ ◆♦t t✉♥♥❡❧s✱ ❜✉t ♠✐❝r♦✇❛✈❡s ✭✜rst ✶✵♠s✱ t❤❡♥ ✾♠s✱ ♥♦✇ ✽✳✺♠s✮✳ ◮ ❆♥❛❧♦❣♦✉s r❛❝❡s ♦❝❝✉rr✐♥❣ t❤r♦✉❣❤♦✉t t❤❡ ✜♥❛♥❝✐❛❧ s②st❡♠✱ s♦♠❡t✐♠❡s ♠❡❛s✉r❡❞ ❛s ✜♥❡❧② ❛s ♠✐❝r♦s❡❝♦♥❞s ♦r ♥❛♥♦s❡❝♦♥❞s ◮ ▲❛st ♠♦♥t❤ ❛❧♦♥❡✿ ▲❛s❡rs✱ ❇✉s✐♥❡ss❲✐r❡

❚❤❡ ❍❋❚ ❆r♠s ❘❛❝❡✿ ▼❛r❦❡t ❉❡s✐❣♥ P❡rs♣❡❝t✐✈❡ ◮ ❲❡ ❡①❛♠✐♥❡ t❤❡ ❍❋❚ ❛r♠s r❛❝❡ ❢r♦♠ t❤❡ ♣❡rs♣❡❝t✐✈❡ ♦❢ ♠❛r❦❡t ❞❡s✐❣♥✳ ◮ ❲❡ ❛ss✉♠❡ t❤❛t ❍❋❚✬s ❛r❡ ♦♣t✐♠✐③✐♥❣ ✇✐t❤ r❡s♣❡❝t t♦ ♠❛r❦❡t r✉❧❡s ❛s t❤❡②✬r❡ ♣r❡s❡♥t❧② ❣✐✈❡♥ ◮ ❇✉t✱ ❛s❦ ✇❤❡t❤❡r t❤❡s❡ ❛r❡ t❤❡ r✐❣❤t r✉❧❡s ◮ ❆✈♦✐❞s ♠✉❝❤ ♦❢ t❤❡ ✏✐s ❍❋❚ ❣♦♦❞ ♦r ❡✈✐❧❄✑ t❤❛t s❡❡♠s t♦ ❞♦♠✐♥❛t❡ t❤❡ ❞✐s❝✉ss✐♦♥ ♦❢ ❍❋❚ ◮ ■♥st❡❛❞✱ ❛s❦ ❛t ❛ ❞❡❡♣❡r ❧❡✈❡❧ ✇❤❛t ✐s ✐t ❛❜♦✉t ♠❛r❦❡t ❞❡s✐❣♥ t❤❛t ✐♥❝❡♥t✐✈✐③❡s ❛r♠s r❛❝❡ ❜❡❤❛✈✐♦r✱ ❛♥❞ ✐s t❤✐s ❞❡s✐❣♥ ♦♣t✐♠❛❧ ◮ ❈❡♥tr❛❧ ♣♦✐♥t✿ ❍❋❚ ❛r♠s r❛❝❡ ✐s ❛ s②♠♣t♦♠ ♦❢ ❛ ❜❛s✐❝ ✢❛✇ ✐♥ ♠♦❞❡r♥ ✜♥❛♥❝✐❛❧ ♠❛r❦❡t ❞❡s✐❣♥✿ ❝♦♥t✐♥✉♦✉s✲t✐♠❡ tr❛❞✐♥❣✳ ◮ Pr♦♣♦s❛❧✿ ♠❛❦❡ t✐♠❡ ❞✐s❝r❡t❡✳ ◮ ❘❡♣❧❛❝❡ ❝♦♥t✐♥✉♦✉s✲t✐♠❡ ❧✐♠✐t ♦r❞❡r ❜♦♦❦s ✇✐t❤ ❞✐s❝r❡t❡✲t✐♠❡ ❢r❡q✉❡♥t ❜❛t❝❤ ❛✉❝t✐♦♥s ✿ ✉♥✐❢♦r♠✲♣r✐❝❡ s❡❛❧❡❞✲❜✐❞ ❞♦✉❜❧❡ ❛✉❝t✐♦♥s ❝♦♥❞✉❝t❡❞ ❛t ❢r❡q✉❡♥t ❜✉t ❞✐s❝r❡t❡ t✐♠❡ ✐♥t❡r✈❛❧s✱ ❡✳❣✳✱ ❡✈❡r② ✶ s❡❝♦♥❞ ♦r ✶✵✵♠s✳ ◮ ▼✐♥✐♠❛❧ ❞❡♣❛rt✉r❡ ❢r♦♠ ❈▲❖❇ t❤❛t ❡❧✐♠✐♥❛t❡s t❤❡ ♣r♦❜❧❡♠s ❝❛✉s❡❞ ❜② ❝♦♥t✐♥✉♦✉s✲t✐♠❡ tr❛❞✐♥❣

❋r❡q✉❡♥t ❇❛t❝❤ ❆✉❝t✐♦♥s ❆ s✐♠♣❧❡ ✐❞❡❛✿ ♠❛❦❡ t✐♠❡ ❞✐s❝r❡t❡✳ ✶✳ ❈♦♥t✐♥✉♦✉s ❧✐♠✐t✲♦r❞❡r ❜♦♦❦s ❞♦♥✬t ❛❝t✉❛❧❧② ✏✇♦r❦✑ ✐♥ ❝♦♥t✐♥✉♦✉s t✐♠❡✿ ♠❛r❦❡t ❝♦rr❡❧❛t✐♦♥s ❝♦♠♣❧❡t❡❧② ❜r❡❛❦ ❞♦✇♥❀ ❢r❡q✉❡♥t t❡❝❤♥✐❝❛❧ ❛r❜✐tr❛❣❡ ♦♣♣♦rt✉♥✐t✐❡s ✷✳ ❚❡❝❤♥✐❝❛❧ ❛r❜✐tr❛❣❡ ♦♣♣♦rt✉♥✐t✐❡s ✕❃ ❛r♠s r❛❝❡✳ ❆r♠s r❛❝❡ ❞♦❡s r❡❞✉❝❡ t❤❡ ❞✉r❛t✐♦♥ ♦❢ t❤❡ ♠❛r❦❡t ❢❛✐❧✉r❡s❀ ❛r♠s r❛❝❡ ❞♦❡s ♥♦t ❛❝t✉❛❧❧② ✜① t❤❡ ♠❛r❦❡t ❢❛✐❧✉r❡s ✸✳ ❚❤❡♦r② ♠♦❞❡❧✿ ❝r✐t✐q✉❡ ♦❢ t❤❡ ❈▲❖❇ ♠❛r❦❡t ❞❡s✐❣♥ ◮ ❙❤♦✇s t❤❛t t❤❡ ❛r♠s r❛❝❡ ✐s ❛ ♥❡✈❡r✲❡♥❞✐♥❣✱ ❡q✉✐❧✐❜r✐✉♠✱ ❢❡❛t✉r❡ ♦❢ t❤❡ ♠❛r❦❡t ❞❡s✐❣♥ ✭❤❡❧♣s ❡①♣❧❛✐♥ ❡♠♣✐r✐❝❛❧ ❢❛❝ts✮ ◮ ■❞❡♥t✐✜❡s t❤❡ ❝♦sts ♦❢ t❤❡ ❛r♠s r❛❝❡ ◮ ❍❛r♠s ❧✐q✉✐❞✐t② ✭s♣r❡❛❞s✱ ❞❡♣t❤✮ ◮ ❙♦❝✐❛❧❧② ✇❛st❡❢✉❧ ✹✳ ❋r❡q✉❡♥t ❇❛t❝❤ ❆✉❝t✐♦♥s ❛s ❛ ♠❛r❦❡t ❞❡s✐❣♥ r❡s♣♦♥s❡ ◮ ❇❡♥❡✜ts✿ ❡❧✐♠✐♥❛t❡s ❛r♠s r❛❝❡✱ ❡♥❤❛♥❝❡s ❧✐q✉✐❞✐t②✱ ❡♥❤❛♥❝❡s ♠❛r❦❡t st❛❜✐❧✐t② ◮ ❈♦st✿ ✐♥✈❡st♦rs ♠✉st ✇❛✐t ❛ s♠❛❧❧ ❛♠♦✉♥t ♦❢ t✐♠❡ t♦ tr❛❞❡

❋r❡q✉❡♥t ❇❛t❝❤ ❆✉❝t✐♦♥s ❆ s✐♠♣❧❡ ✐❞❡❛✿ ♠❛❦❡ t✐♠❡ ❞✐s❝r❡t❡✳ ✶✳ ❈♦♥t✐♥✉♦✉s ❧✐♠✐t✲♦r❞❡r ❜♦♦❦s ❞♦♥✬t ❛❝t✉❛❧❧② ✏✇♦r❦✑ ✐♥ ❝♦♥t✐♥✉♦✉s t✐♠❡✿ ♠❛r❦❡t ❝♦rr❡❧❛t✐♦♥s ❝♦♠♣❧❡t❡❧② ❜r❡❛❦ ❞♦✇♥❀ ❢r❡q✉❡♥t t❡❝❤♥✐❝❛❧ ❛r❜✐tr❛❣❡ ♦♣♣♦rt✉♥✐t✐❡s ✷✳ ❚❡❝❤♥✐❝❛❧ ❛r❜✐tr❛❣❡ ♦♣♣♦rt✉♥✐t✐❡s ✕❃ ❛r♠s r❛❝❡✳ ❆r♠s r❛❝❡ ❞♦❡s r❡❞✉❝❡ t❤❡ ❞✉r❛t✐♦♥ ♦❢ t❤❡ ♠❛r❦❡t ❢❛✐❧✉r❡s❀ ❛r♠s r❛❝❡ ❞♦❡s ♥♦t ❛❝t✉❛❧❧② ✜① t❤❡ ♠❛r❦❡t ❢❛✐❧✉r❡s ✸✳ ❚❤❡♦r② ♠♦❞❡❧✿ ❝r✐t✐q✉❡ ♦❢ t❤❡ ❈▲❖❇ ♠❛r❦❡t ❞❡s✐❣♥ ◮ ❙❤♦✇s t❤❛t t❤❡ ❛r♠s r❛❝❡ ✐s ❛ ♥❡✈❡r✲❡♥❞✐♥❣✱ ❡q✉✐❧✐❜r✐✉♠✱ ❢❡❛t✉r❡ ♦❢ t❤❡ ♠❛r❦❡t ❞❡s✐❣♥ ✭❤❡❧♣s ❡①♣❧❛✐♥ ❡♠♣✐r✐❝❛❧ ❢❛❝ts✮ ◮ ■❞❡♥t✐✜❡s t❤❡ ❝♦sts ♦❢ t❤❡ ❛r♠s r❛❝❡ ◮ ❍❛r♠s ❧✐q✉✐❞✐t② ✭s♣r❡❛❞s✱ ❞❡♣t❤✮ ◮ ❙♦❝✐❛❧❧② ✇❛st❡❢✉❧ ✹✳ ❋r❡q✉❡♥t ❇❛t❝❤ ❆✉❝t✐♦♥s ❛s ❛ ♠❛r❦❡t ❞❡s✐❣♥ r❡s♣♦♥s❡ ◮ ❇❡♥❡✜ts✿ ❡❧✐♠✐♥❛t❡s ❛r♠s r❛❝❡✱ ❡♥❤❛♥❝❡s ❧✐q✉✐❞✐t②✱ ❡♥❤❛♥❝❡s ♠❛r❦❡t st❛❜✐❧✐t② ◮ ❈♦st✿ ✐♥✈❡st♦rs ♠✉st ✇❛✐t ❛ s♠❛❧❧ ❛♠♦✉♥t ♦❢ t✐♠❡ t♦ tr❛❞❡

▼❛r❦❡t ❈♦rr❡❧❛t✐♦♥s ❇r❡❛❦ ❉♦✇♥ ❛t ❍✐❣❤ ❋r❡q✉❡♥❝② ❊❙ ✈s✳ ❙P❨✿ ✶ ❉❛② 1170 1180 ES Midpoint SPY Midpoint 1160 1170 1150 1160 1140 1150 Index Points (SPY) Index Points (ES) 1130 1140 1120 1130 1110 1120 1100 1110 1090 1100 09:00:00 10:00:00 11:00:00 12:00:00 13:00:00 14:00:00 Time (CT)

▼❛r❦❡t ❈♦rr❡❧❛t✐♦♥s ❇r❡❛❦ ❉♦✇♥ ❛t ❍✐❣❤ ❋r❡q✉❡♥❝② ❊❙ ✈s✳ ❙P❨✿ ✶ ❤♦✉r ES Midpoint SPY Midpoint 1140 1150 1130 1140 Index Points (SPY) Index Points (ES) 1120 1130 1110 1120 1100 1110 13:30:00 13:45:00 14:00:00 14:15:00 14:30:00 Time (CT)

▼❛r❦❡t ❈♦rr❡❧❛t✐♦♥s ❇r❡❛❦ ❉♦✇♥ ❛t ❍✐❣❤ ❋r❡q✉❡♥❝② ❊❙ ✈s✳ ❙P❨✿ ✶ ♠✐♥✉t❡ ES Midpoint SPY Midpoint 1120 1126 1118 1124 Index Points (SPY) Index Points (ES) 1116 1122 1114 1120 13:51:00 13:51:15 13:51:30 13:51:45 13:52:00 Time (CT)

▼❛r❦❡t ❈♦rr❡❧❛t✐♦♥s ❇r❡❛❦ ❉♦✇♥ ❛t ❍✐❣❤ ❋r❡q✉❡♥❝② ❊❙ ✈s✳ ❙P❨✿ ✷✺✵ ♠✐❧❧✐s❡❝♦♥❞s ES Midpoint SPY Midpoint 1120 1126 Index Points (SPY) Index Points (ES) 1119 1125 1118 1124 1117 1123 13:51:39.500 13:51:39.550 13:51:39.600 13:51:39.650 13:51:39.700 13:51:39.750 Time (CT)

▼❛r❦❡t ❈♦rr❡❧❛t✐♦♥s ❇r❡❛❦ ❉♦✇♥ ❛t ❍✐❣❤ ❋r❡q✉❡♥❝② ❊❙ ✈s✳ ❙P❨✿ ❈♦rr❡❧❛t✐♦♥s ❜② ❚✐♠❡ ■♥t❡r✈❛❧ ✐♥ ✷✵✶✶ 1 0.9 0.8 0.7 0.6 Correlation 0.5 0.4 0.3 0.2 0.1 Median Min/Max 0 0 5 10 15 20 25 30 Return Time Interval (sec)