Program Trading and Intraday Volatility

Lawerence Harris · George Sofianos · James E. Shapiro

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

Program trading and intraday changes in the S&P 500 Index are correlated. Futures prices and, to a lesser extent, cash prices lead program trades. Index arbitrage trades are followed by an immediate change in the cash index, which ultimately reverses slightly. No reversal follows nonarbitrage trades. The cumulative index changes associated with buy-and-sell trades and with arbitrage and nonarbitrage trades all are similar. Price decompositions suggest that the results are not due to microstructure effects. Program trades in this 1989–1990 sample do not seem to have created major short-term liquidity problems. The results are stable within the sample.

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References

1984A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market 1995An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse 1988Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices 1989S&P 500 Cash Stock Price Volatilities 1987Program Trading and Expiration-Day Effects 1989The October 1987 S&P 500 Stock-Futures Basis 1996New York Stock Exchange Systems and Trading Procedures 1993Index Arbitrage Profitability

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1996Order characteristics and stock price evolution An application to program trading 2001The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks 1995New trading practices and short‐run market efficiency 1993Intraday relationships among index arbitrage, spot and futures price volatility, and spot market volume: A transactions data test 2010Order characteristics and the sources of commonality in prices and liquidity

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