Return Dynamics and Trading Strategy in Alternative Trading Systems

Abstract

This article examines intra-day price relationships between electronic and floor (pit) trading markets for the S&P 500 and Nasdaq 100 equity index futures. The two contracts trade in dual open outcry and electronic platforms during non-overlapping trading hours. The results indicate that closing transactions on the electronic market have a systematically negative influence on the opening prices established on the pit. In contrast, pit prices at the end of the regular trading have a positive, but less pronounced impact on the opening prices established in the electronic exchange. Based on this relationship, we document a profitable high-frequency trading strategy that can only be partly explained by macroeconomic news.

TOPICS: Exchanges/markets/clearinghouses, portfolio construction, statistical methods