Hostname: page-component-586b7cd67f-g8jcs Total loading time: 0 Render date: 2024-12-01T09:04:59.706Z Has data issue: false hasContentIssue false
  • English
  • Français

SOES Trading and Market Volatility

Published online by Cambridge University Press:  06 April 2009

Robert H. Battalio ,
Brian Hatch  and
Robert Jennings
Robert H. Battalio
Affiliation:
Department of Finance, College of Business Administration, University of Notre Dame, Notre Dame, IN 46556
Brian Hatch
Affiliation:
College of Business and Economics, University of Delaware, Newark, DE 19716
Robert Jennings
Affiliation:
Graduate School of Business, Indiana University, Bloomington, IN 47405
Get access Rights & Permissions [Opens in a new window]

Abstract

The National Association of Security Dealers alleges that professional-trader use of the Small Order Execution System (SOES) causes greater security price volatility. We document bidirectional Granger causality between a proxy for professional SOES trading (the frequency of maximum-sized SOES trades) and a measure of stock price volatility. We find that high levels of volatility precede high levels of maximum-sized SOES trades, suggesting that volatility causes more frequent large SOES trades. Likewise, over a one-minute time interval, high levels of maximum-sized SOES trades cause high volatility. Over longer periods, however, intense maximum-sized SOES trading causes lower volatility. Interpreted in conjunction with Harris and Schultz (1997), these results suggest that high levels of maximum-sized SOES trades lead to more efficient price discovery. In light of these results, we believe that efforts to eliminate SOES based on volatility considerations are unwarranted.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 32 , Issue 2 , June 1997 , pp. 225 - 238
Copyright
Copyright © School of Business Administration, University of Washington 1997

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

“Who Watches the Watchdog at Nasdaq?” Business Week, (05 15, 1995), 102–109.Google Scholar
Chan, K.; Christie, W.; and Schultz, P.. “Market Structure and the Intraday Pattern of Bid-Ask Spreads for Nasdaq Securities.” Journal of Business, 68 (01 1995), 35–60.CrossRefGoogle Scholar
Christie, W.; Harris, J.; and Schultz, P.. “Why Did Nasdaq Market Makers Stop Avoiding Odd-Eighth Quotes?” Journal of Finance, 49 (12 1994), 1841–1860.Google Scholar
Christie, W., and Schultz, P.. “Why Do Nasdaq Market Makers Avoid Odd-Eighth Quotes?” Journal of Finance, 49 (12 1994), 1813–1840.Google Scholar
Cohen, K., and Conroy, R.. “An Empirical Study of the Effect of Rule 19c-3.” Journal of Law and Economics, 33 (04 1990), 277–305.CrossRefGoogle Scholar
Cohen, K.; Maier, S.; Schwartz, R.; and Whitcomb, D.. “Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread.” Journal of Political Economy, 89 (04 1981), 287–307.CrossRefGoogle Scholar
Davis, J., and Lightfoot, L.. “Fragmentation vs. Consolidation of Securities Trading: Evidence from the Operation of Rule 19c-3.” Working Paper, Securities and Exchange Commission (1990).Google Scholar
Granger, C. “Investigating the Causal Relations by Econometric Models and Cross Spectral Methods.” Econometrica, 37 (07 1969), 424–438.CrossRefGoogle Scholar
Grossman, S. “Program Trading and Market Volatility: A Report on Interday Relationships.” Financial Analysts Journal, 44 (07–08 1988), 18–28.CrossRefGoogle Scholar
Harris, J., and Schultz, P.. “Automated Executions are Different: An Empirical Examination of Changes in SOES Rules.” Journal of Financial Economics (forthcoming 1997).Google Scholar
Harris, J., and Schultz, P.. “The Trading Profits of SOES Bandits.” Working Paper, Ohio State Univ. (1996).Google Scholar
Houtkin, H.The SOES Bandits' Guide: Day Trading in the 21st Century. All-Tech Investment Group, Inc. (1995).Google Scholar
Jones, C.; Kaul, G.; and Lipson, M.. “Transactions, Volume and Volatility.” Review of Financial Studies, 7 (Winter 1994), 631–651.CrossRefGoogle Scholar
Karpoff, J. “The Relation between Price Changes and Trading Volume: A Survey.” Journal of Financial and Quantitative Analysis, 22 (03 1987), 109–126.CrossRefGoogle Scholar
Mendelson, H. “Consolidation, Fragmentation and Market Performance.” Journal of Financial and Quantitative Analysis, 22 (06 1987), 189–207.CrossRefGoogle Scholar
National Association of Security Dealers. “Impact of SOES Active Trading Firms on Nasdaq Market Quality.” Unpubl. Report, NASD Department of Economic Research (1993).Google Scholar
“The SOES Issue.” Traders Magazine, (09 1995), 1–10.Google Scholar
U. S. Securities and Exchange Commission. The October 1987 Market Break. Division of Market Regulation (1988a).Google Scholar
U. S. Securities and Exchange Commission. Release No. 34–25791, Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Accelerated Approval to Proposed Rule Change, as Amended (1988b).Google Scholar
U. S. Securities and Exchange Commission. Release No. 34–32313, Self-Regulatory Organizations; Notice of Amendment of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the Small Order Execution System, (1993a).Google Scholar
U. S. Securities and Exchange Commission. Release No. 34–33377, Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Partially Approving Proposed Rule Change Relating to the Small Order Execution System on Pilot Basis, (1993b).Google Scholar
“Nasdaq Small Order Plan Draws Protests.” Wall Street Journal, (12 21, 1993), p. C1.Google Scholar
“Nasdaq's SOES Bandits Seek Recruits.” Wall Street Journal, (06 1, 1995), p. C1.Google Scholar
Wood, R., and McInish, T.. “The Effect of NYSE Rule 390 and Spreads, Premiums, and Volatility.” Working Paper, Univ. of Memphis (1992).Google Scholar