Trading research papers

From Larry Harris' home page here.

Or just download below.

Interesting, interesting, interesting...ole Larry comes up with some interesting stuff.

For the zero sum book check out the "Stylized Trader Summary" at the end. Can you pick yourself out?

Front running & exposure books ain't bad either!

Nice collection of books on how dealers & brokers operate generally at the expense of customers.

Final one from Larry...

I thought I'd resurrect this thread and dump a whole load of (what i hope will be) interesting research papers for everyones benefit. All are free as far as I know, the commercial ones want the dough up front.

Would be interesting addition to this section I think, even if they're not all for beginners. (Also good to keep them all in one place on the net as a secondary backup.)

One of the best out there - Larry Harris. Here is the abstract:

Exchanges adopted several circuit breakers and program trading limits following the 1987 Stock Market Crash. The intended purpose of these policies was to reduce volatility. Unfortunately, there has not been enough extreme volatility to conclusively determine whether they have been effective. The lack of volatility does not demonstrate their effectiveness since extreme volatility is very rare. Theoretical studies are also inconclusive. Some suggest that circuit breakers help prevent crashes by giving people time to respond with full information. Others suggest that they accelerate price changes caused by traders afraid they may not be able to trade. Some simple principles from political economy suggest why exchanges adopted the circuit breakers that they did.

Would be interesting if ppl would discuss these topics tho (after reading them).

Harris, Lawrence, forthcoming, Financial Markets, Institutions & Instruments, v. 7, no. 2, 1998.

Abstract

Order submission strategy is the most important determinant of execution quality that investors directly control. Traders must decide when to submit market orders and when to submit limit orders. When they submit limit orders, they must know where to place their limit prices. If their limit orders do not execute, they must know when and how to resubmit their orders. This risk affects the original order submission decision.

These decisions affect the demand for and supply of liquidity. Most existing studies analyze market liquidity by assuming that only market-makers supply liquidity. In practice, public investors also supply liquidity when they submit limit orders. Since public investors demand liquidity when they submit market orders and supply liquidity when they submit limit orders, market liquidity depends on their order submission strategies.

The benefits and risks associated with an order strategy depend on the specific trading problem the trader must solve. Traders who face early deadlines and traders who believe that they have material information that will soon become public are impatient to trade. They use market orders or aggressively priced limit orders. Conversely, value-motivated traders may be willing to wait until profitable trading opportunities arise. These traders place limit orders far from the market to represent their interests when they are unable or unwilling to continuously monitor the market.

This paper derives optimal dynamic order submission strategies for trading problems faced by three stylized traders: an uninformed precommitted liquidity trader, an informed trader and a value-motivated trader. These three stylized trading problems capture most essential elements of the actual trading problems practitioners encounter when trading small orders. The results help characterize the relation between time and price in the search for liquidity. The paper thus provides a more complete understanding of the value of immediacy. Separate solutions are obtained for quote- and order-driven markets. It is never optimal for the public to submit a limit order to a pure dealer market. The paper also examines how brokers form their order submission strategies when their customers evaluate their performance using various transaction cost measurement methods. Transaction cost measurement methods based on implementation shortfall dominate other methods.

This one is for darkstar (if you're still out there) and mike:

The success of any financial market depends on the ability of the market to determine the proper price for the assets traded in the market. This can be achieved by matching the demand and supply in an efficient and effective manner. An efficient market should provide enough liquidity for the assets traded in the market. The role of the market maker in providing liquidity is widely recognized, but liquidity can also arise from other aspects of the trading mechanism. Liquidity in the market depends on many macro-economic factors like country’s financial policy, regulatory environment, interest rates, inflation and market micro-factors like the type of asset that is traded, the price of the asset, the structure of the market or the market design, the protocol that is followed in determining the price, information about the asset that is traded, market participants, ability of the participants to observe the information and use the same for making purchase and sale decisions and finally the transaction cost involved in the process of buying and selling.

This white paper studies the impact of some of the important market micro-factors mentioned above on the price of the asset traded in the market. The study involves an understanding and analysis of how these micro factors affect the asset price and liquidity in the market.

Given the recent sub-prime fiasco and central bank intervention, these two are timely reads.

We report findings from a survey of United States foreign exchange traders. Our results indicate that:

(i) in recent years electronically-brokered transactions have risen substantially, mostly at the expense of traditional brokers;

(ii) the market norm is an important determinant of interbank bid-ask spread and the most widely-cited reason for deviating from the conventional bid-ask spread is a thin/hectic market;

(iii) half or more of market respondents believe that large players dominate in the dollar-pound and dollar-Swiss franc markets;

(iv) technical trading best characterizes about 30% of traders, with this proportion rising from five years ago;

(v) news about macroeconomic variables is rapidly incorporated into exchange rates;

(vi) the importance of individual macroeconomic variables shifts over time, although interest rates always appear to be important;

(vii) economic fundamentals are perceived to be more important at longer horizons, while short-run deviations from the fundamentals are attributed to excess speculation and institutional customer/hedge fund manipulation;

(viii) speculation is generally viewed positively, as enhancing market efficiency and liquidity, even though it exacerbates volatility;

(ix) central bank intervention does not appear to have substantial effect, although there is general agreement that it increases volatility, and finally;

(x) traders do not view purchasing power parity as a useful concept, even though a significant proportion (40%) believe that it affects exchange rates at horizons of over six months.

Wow

Thank you very much for the papers, from an academical viewpoint.

Last one for now, this ones from the ECB:

There should be plenty of material here for ppl to chew on. I hope some of the more difficult passages can be explained more simply for everybody (including me) by the more experienced readers.

anyone has the fx timezones white paper?

I really liked these papers. Different view of things….

can technical analysis actually give you an edge?

predictive power of candles.