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Algorithms for Flow Trades at NASDAQ around its Close

  • Author / Creator
    Yan, Chad
  • For many investors, such as mutual fund managers, the closing price of a stock is an important benchmark. The closing price for stocks traded at NASDAQ is determined through an auction, like at many other stock exchanges. Each day and for each stock traded at NASDAQ, the intertemporal order imbalance of the auction is announced beginning ten minutes before the close. We introduce a mathematical framework that takes the order imbalance announcements into account, and then derive an optimal trading algorithm for flow trades, whose benchmark is the closing price. Under suitable assumptions, we find explicit formulas for the optimal trading strategy and that it is not beneficial for the investor to trade after the imbalance announcement. However, in addition to participating in the auction, the investor trades before the imbalance announcement to benefit from prices which do not reflect the later impact of the investor's own auction order. Using real historical data, we simulate the performance of the proposed algorithm and find a small, but persistent out-of-sample improvement and a reduction in average trading costs.

  • Subjects / Keywords
  • Graduation date
    Spring 2017
  • Type of Item
    Thesis
  • Degree
    Master of Science
  • DOI
    https://doi.org/10.7939/R3C24R42B
  • License
    This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.