Trading Strategies during Circuit Breakers and Extreme Market Movements
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Trading Strategies during Circuit Breakers and Extreme Market Movements
Comments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market MovementsEL Classification:G10;G18.G23: G24; G28* Associate Professor of Finance FinanceJoseph Winn Term ChairFinance DepartmentBabson College223 Tomasso HallBabson Park. MA 02457-0310Ph:Email:**Assistant Professor ofSchool of BusinessUniversity of Wisconsin - Madison975 University AvenueMadison. wi 53706Ph: Trading Strategies during Circuit Breakers and Extreme Market Movements(608) 265-3494(781) 239-4402Email:kkavajgczgbus.wjsc.eduGoldsteinfrPbabson.eduWe gratefully acknowledge the helpful comments from participants ar theTrading Strategies during Circuit Breakers and Extreme Market Movements
American Finance Association Meetings in New Orleans, the Financial Management Association Conference in Seattle, the NBER Microstructure Conference, Comments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsarticipants at Babson College, Columbia University. Georgetown University. Massachusetts Institute of Technology. New York University, and researchers at the National Association of Security Dealers and the Security and Exchange Commission. We alsohttps://khothuvien.cori!(hank Jeff Bacidore, Geert B Trading Strategies during Circuit Breakers and Extreme Market Movementsekaert. James Cochrane, Robert Engle. Simon Gervais. Jay Hartzel. Eugene Kandel. Joseph Kenrick, Charles Lee, Brace Lehmann, Edward Nelling, ElizabethTrading Strategies during Circuit Breakers and Extreme Market Movements
odders-white, Maureen O’Hara, Craig MacKinlay, Gideon Saar, Patrik Sandás, George Sofianos, Chester Spatt and Avanidhar Subrahmanyam (Editor), and thComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsl remaining errors are our own. This paper was Initiated while Michael Goldstein was the Visiting Economist at the New York Stock Exchange. The comments and opinions expressed in this paper are the authors' and do not necessarily reflect those of the directors, members or officers of the New York St Trading Strategies during Circuit Breakers and Extreme Market Movementsock Exchange, Inc.Trading Strategies during Circuit Breakers and Extreme Market MovementsWe study the trading strategics of NYSE market participants tTrading Strategies during Circuit Breakers and Extreme Market Movements
hrough their choice of venue, order type and timing during the turbulent October 1997 period. During tills period, we find the irnplic il costs of supComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsnstead for the flexibility and disc retion of floor trading. In addition, we line! that ahead cd’a market-wide closure. market partic ipants display behavior consistent with the magnet effect, while during the market-wide c losure they curtail activity. Our results have implications for the viabilit Trading Strategies during Circuit Breakers and Extreme Market Movementsy of ECNs and electronic limit order books during turbulent periods as well as regulation aimed at maintaining the orderly working of markets during cTrading Strategies during Circuit Breakers and Extreme Market Movements
risis periods.https://khothuvien.cori!1. IntroductionThe equity trading landscape is made up of many different trading systems, each with its own uniqComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsaction costs. Prominent examples include the New York Stock Exchange’s (NYSE) SuperDot system, Nasdaq’s SuperMontage, Electronic Communication Networks (ECNs), alternative trading systems such as Posit or Primex, and international equity exchanges in Paris and Toronto. On the other end of the spectr Trading Strategies during Circuit Breakers and Extreme Market Movementsum are more human interactive systems, such as the negotiated dealer system of Nasdaq, the floor of the NYSE and the upstairs market, that provide a rTrading Strategies during Circuit Breakers and Extreme Market Movements
ich environment on which to condition orders, thereby enabling a high level of trading discretion. These two types of systems, electronic and human baComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsng choices, weighing the costs and benefits of these competing systems. As part of an overall trading strategy, market participants chose the trading venue on which to trade, the type of order to send, and the timing of their actions. Depending on market conditions, traders might prefer one alternat Trading Strategies during Circuit Breakers and Extreme Market Movementsive to another. The ultimate choices of market participants have the ability to bring to light many of the economic tradeoffs they face when trading.OTrading Strategies during Circuit Breakers and Extreme Market Movements
ur focus is the strategic trading decisions made by market participants and how these vary' with market conditions. We compare the trading behavior ofComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsd in the market, namely the market break on October 27-28. 1997.1 Specifically, we1 On Monday. October 27, stock prices on tile New York Stock Exchange (NYSE) declined precipitously, as shown in the Appendix. By 2:36 PM. the Dow Jones Industrial Average (DJIA) had lost 350 points frorn the previous Trading Strategies during Circuit Breakers and Extreme Market Movementsday’s close, causing the “circuit breaker” provision of NYSE Rule 80B to be triggered for the first time since the rule was adopted in late 1988, resuTrading Strategies during Circuit Breakers and Extreme Market Movements
lting in a half hour market-wide trading halt. Although trading resumed at 3:06 PM, by 3:36 PM, the DJIA fell another 200 points, once again triggerinComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movements drop to that date. On the following day, Tuesday. October 28, 1997, the DJIA regained 337 points, the largest single-day point increase up to that time. In addition, trading volume on the NYSE soared to a record 1.2 billion shares, almost doubling its previous record of 684 million shares set on Ja Trading Strategies during Circuit Breakers and Extreme Market Movementsnuary 23, 1997. Moreover, each of the trading days between Thursday, October 23. 1997 and Thursday, October 30. 1997 rank in the top 10 busiest NYSE tTrading Strategies during Circuit Breakers and Extreme Market Movements
rading days up to that date. For an extensive description of the NYSE trading activity 1analyze three questions: (1) Whether the choice of trading plaComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementsloor during periods of market turbulence, and does the decision depend on the characteristic of the stock traded? (2) Do market participants switch order type, and, if so, are market orders or limit orders preferred during periods of extreme market movements? (3) When do market participants begin to Trading Strategies during Circuit Breakers and Extreme Market Movements implement these changes?Each of these questions remains an open question theoretically and empirically. For example, with respect to the venue choiceTrading Strategies during Circuit Breakers and Extreme Market Movements
, there are two contrasting models. On one hand. Glosten (1994) develops a model where the electronic limit order book market dominates any competing Comments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JE Trading Strategies during Circuit Breakers and Extreme Market Movementson which they can condition and that market participants value trading flexibility, Grossman (1992) demonstrates that the added flexibility offered by the upstairs market over traditional limit orders may allow the upstairs market to continue functioning while the “downstairs” market may fail or shu Trading Strategies during Circuit Breakers and Extreme Market Movementst down with very wide bid-ask spreads. Bessembinder and Venkataraman (2003) provide empirical evidence for the issues raised in Grossman (1992) usingTrading Strategies during Circuit Breakers and Extreme Market Movements
data from the Paris Bourse.2 In addition, Lyons (2000) shows that in foreign exchange markets, the direct dealer market is chosen over the use of limiComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JEComments WelcomeTiading Strategies during Circuit Breakers and Extreme Market MovementsMichael A. Goldstein* and Kenneth A. Kavajecz**August 4. 2003JEGọi ngay
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