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By Beverly Chandler, Opalesque London:
Liquidity, volatility and low transaction costs are the three things that lie behind a market that can be used for short-term trading according to a new report from Newedge. Authored by Newedge’s Ryan Duncan and Lauren Lei, the report used real time limit order book histories to determine the markets that had the necessary characteristics. “The frequency with which these strategies enter and exit the market makes it important to have enough volatility to cover the bid-ask spread, which accounts for the majority of transaction costs. In addition, markets that provide sufficient volume and depth help to limit slippage”.
The report found that unsurprisingly, many of the equity index and currency markets ranked
high on their list while short-term interest rates did not. While obviously there can be no guarantee that these characteristics will ensure profitability for short-term trading strategies, the report feels that the findings should offer a fertile ground for managers in this space .
For the study, Duncan and Lei used the Newedge database of historic tick data. “We currently have limit order book data with price and size for the best 5 bids and offers on over 80 futures markets dating back to July 2005. In addition to trades, we record any changes in the limit order book throughout the day such as an update in the quantity offered away from the midmarket.”
They picked the six months from May to November 2010. ...................... To view our full article Click here
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