With the widely emerging electronic platforms in financial market for the exchange of all types of financial instruments (i.e. securities, derivatives, commodities and futures), the electronic centralized order book has become the standard market mechanism for price discovery in today’s financial markets. As a result, many investors now employ algorithmic trading to automatically make trading decisions, submit orders, and manage those orders after submission. Algorithmic trading is the use of computer software to help make and execute trading decisions based on some pre-programmed computer algorithms [1]. According to a report by Reuters and Bloomberg, algorithmic trading accounts for over 73% of U.S. equity volumes in 2011. The widely use of algorithmic trading has broad impacts on the financial markets. The effects of algorithmic trading especially high-frequency trading (one type of algorithmic trading which is characterized by its short portfolio holding periods [2]) on the market price stability has been widely recognized since the event of ‘Flash Crash’ in the E-Mini S&P futures market which occurred on May 6, 2010. The 2010 Flash Crash was said to be initiated by an unusually large number of E-Mini S&P 500 contracts selling of a large mutual fund in a joint report by the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The report detailed how the large sell exhausted available buyers and how the high-frequency traders (HFT) started aggressively selling, accelerating the effect of the mutual fund’s selling and contributing to the sharp price drop that day [3]. After this event, a various number of policies have been proposed to create ‘circuit breakers’ and allow markets to r... ... middle of paper ... ...ze based on the strength of the trend. Also, some intraday trading strategies will be developed with the hope that it will further reduce the volatility and increase the Sharpe ratio. Since the quantopian.com provides us with some technical indexes and is compatible with datasets from other sources (i.e. Google trends), we might also consider introducing some technical indexes (i.e. VIX) into our strategies. With more and more sophisticated trading strategies developed, we will try to incorporate those strategies into the agent-based simulation model developed by Prof. Beling’s group. Hopefully, this will help improve the accuracy and reliability of the current zero-intelligence model. Reference [1] http://en.wikipedia.org/wiki/Algorithmic_trading [2] http://en.wikipedia.org/wiki/High-frequency_trading [3] http://en.wikipedia.org/wiki/2010_Flash_Crash
The threat of online competitors is also present to every discount broker that has not switched to online trading or chooses to remain with their current business model and not offer online services. These online trading sites have unique trading capabilities that otherwise are not present at Edward Jones. They offer sound advice on stocks and other investments instantly. Each customer has to call their Edward Jones advisor in order to place a trade. This makes sense to Edward Jones because they want to help prevent the rash decisio...
The attacks of 9/11 resulted in history’s longest stock market shut down since the 1930s. The New York Stock Exchange remained closed for six days after the attacks. Furthermore, Davis (2011) reports that upon reopening, the New York Stock Exchange fell almost seven hundred points, the biggest one day loss in history. Additionally, Jackson (2008) reports a 14% decline in the Dow Jones, a loss the Dow still felt almost a year later. But, it was American Airlines and United Airlines that experienced the greatest loss. Following the reopening of the stock market, American experienced a 39% decline and United experienced a 42% decline (Davis, 2011). However in face of discouraging numbers, Jackson (2008) reports that the U.S. markets rebounded second only to Japan, showing the great economic resilience of the U.S. While the stock markets present a bleak outlook immediately following the attacks, the financial loss is far from reassuring.
Not only were millions of Americans been put out of work due to these manager’s actions, the American financial markets themselves were pushed to the brink of collapse. Despite the fact that the global financial markets, in reality, are not perfectly efficient, there is a corrective mechanism built into the day-to-day trading in the market. When prices are driven down by large sells, either by large investors or a movement in a stock, there are usually new buyers for these stocks at the cheaper price. Managers of...
It has been said that every good thing must arrive at an end. On account of the Roaring Twenties that end came suddenly and startlingly. It is simple for one to think back upon the monetary circumstance that prompt the accident and disparagement the specialists for not seeing the indications of a potential calamity. Be that as it may, it was not all that simple for them to see such an accident coming. The 1920 's were a blasting decade and stock costs appeared to be at an unfaltering move for an apparently interminable ascent. Numerous elements can be ascribed to the reason for the accident however nobody element can be singled out as the lone reason. The real reasons for the share trading system accident of 1929
Finally, investors went into “panic mode” on October 24th, 1929, and began trading and dumping their shares, totaling a record of 12.9 million. Of course, following “Black Thursday,” the more well-known “Black Tuesday” ensued as a result of this. Between Black Monday and Black Tuesday, the market lost 24% of its value, and investors bought and traded over 28.9 million stocks. These stocks, now worthless, were used as firewood for some investor’s homes. The Dow Jones Company is perhaps the greatest example for this crash. Dow Jones started at 191 points at the beginning of 1928, then more than doubling to 381 points by September 1929. The crash caused their record 381 points to plummet to less than 41 p...
The system could handle 4 million, but not 12.9 million, so people got frightened they would lose their money. People panicked and started selling. The ticker tapes were an hour and a half behind the market. By the end of the day, the market had fallen 33 points, or around 9%. On Monday, the market bounced back a bit, just enough for people to feel a sense of security, until the end of the day when high trading volumes also put too much pressure on the market.
This paper is about the rise and fall of Mt. Gox, the first and largest Bitcoin exchange service, very similar to a stock exchange. Mt. Gox was based in Japan. It was launched in 2010, by 2013 it was processing 70% of all Bitcoin transactions globally, but in February of 2014, the company realized it had no Bitcoins left in its “vault”. The company had literally lost billions of dollars in Bit...
The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to explain human investors’ behaviors.
In conclusion, Modern Portfolio Theory and Financial Engineering have been great financial models that helped investors all around the world. However, they have been associated with some crisis because of their assumptions. Generally, financial models assume in order to simplify the reality, so most of the time the assumptions should work. The article described each models and the roles they played in financial crises as well as some best practice of them in the future.
“One of the very nice things about investing in the stock market is that you learn about all different aspects of the economy. It's your window into a very large world,” Ron Chernow once said. The stock market is undoubtedly an incredibly important economic feature, one that our modern world depends on. Indeed, the stock market is so integral to our life today that it can serve as a valuable tool where financial literacy is concerned. Two of the most important financial lessons that the stock market teaches are financial literacy terminology as well as a historical understanding of stock market institutions. The Stock Market Game simulation serves to teach these lessons in a secure environment, and
This essay will examine the concept of market failure and the measures that governments take remedy the failure of the market.
Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
The biggest stock exchanges are the New York Stock Exchange and NASDAQ. The New York Stock Exchange is a large building in Lower Manhattan that does auction-style trading with a lot of face to face interaction through specialists, brokers, and buyers. There are upper floors in this exchange on which specialists determine the prices of all the stocks. This information then travels to the brokers who work auctions face to face with buyers in order to sell the stocks. America’s biggest companies, like Coca-Cola and McDonald’s, sell their stocks through this exchange. NASDAQ is a virtual stock exchange with no physical building. This exchange was created during the 1970s but began thriving during the tech boom of the 1990s. The tech boom helped this exchange become the home of more technological companies li...
Have you ever invested in the stock market? If so, do you know where your money is really going? The stock market is a risky business and it can make or break people’s lives. The stock market is used daily to keep America on its trembling feet; it’s also being used at this very moment to cheat people out of money for personal gain. This happens every day in the stock market and its evolving rapidly, super computers that can trade faster than a blink of an eye, social media trends that can predict share values, and intricate stock market schemes that are getting harder and harder to find and take down.