Alea

Paper by Lada Adamic, Celso Brunetti, Jeffrey H. Harris, and Andrei A. Kirilenko

We apply network analysis to trace patterns of information transmission in an electronic limit order market. If market orders or large executable limit orders are submitted by informed traders, then resulting star-shaped or diamond-shaped patterns – or trading networks – should be associated with large changes in returns, smaller volume, and short duration between trades. In contrast, the execution of small limit orders from uninformed traders should result in networks with many triangular and reciprocal patterns and be associated with smaller changes in returns, larger volume and longer duration between trades. We compute a time series of trading networks using audit trail, transaction-level data for all regular transactions in the September 2008 E-mini S&P 500 futures contract – the cornerstone of price discovery for the S&P 500 Index. We find that network metrics that quantify the shape of a network are statistically significantly related to returns, volatility, volume, and duration.

Excerpt:

……These trading networks are highly dynamic, and the most central node in one period may have few or no edges in the next. In other words, it is quite unlikely that a market order or an executable limit order is so large that it spans several consequtive networks. Of the nearly 27000 trading accounts who bought or sold S&P 500 E-mini futures contracts during August 2008, 17 accounts were extremely active, accounting for nearly 40 percent of all transactions. On the other hand, 85 percent of trading accounts traded only 10 percent of all transactions.

H.T. Kimmo Soramaki

Posted by jck on November 6th, 2009 at 1:09 pm    0 Comment