Thursday, September 29, 2011

Event Timing and High Frequency Trading

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The timing of company specific news events may impact short-term price discovery. This relationship becomes important for a high frequency or short-term trader to understand when events typically occur (e.g. pre-market, during market-hours, or while they are fast asleep).

To learn more about the timing of different events, I consider a set of event categories as detected by RavenPack. In total, there are about 330 event types all mapping into 21 broader groups. For most of these groups, I find high activity pre-market between 6:00 - 9:30 AM Eastern Time (EST), as well as during market-hours between 9:30 AM and 4:00 PM. Furthermore, many events occur after-hours between 4:00-8:00 PM.

Looking at Figure 3, primarily three groups stand out including insider trading, regulatory related events, and credit ratings that tend to occur mostly during market-hours. Looking closer at the insider trading group, I find that very few events occur pre-market for both insider-buy and insider-sell. The main difference between the two categories is that insider-sells are announced during after-hours, while insider-buys are announced post-market between 8:00 PM and 0:00 AM.

Compared to unscheduled events such as reorganizations, mergers, or strikes; scheduled events tend to occur more often pre-market or after-hours. More specifically, I find that about 48% of scheduled events take place pre-market compared to 40% for unscheduled events. During market-hours, the numbers are 23% and 40% for scheduled versus unscheduled events, respectively. While 29% of events during after-hours are considered scheduled, the equivalent value for unscheduled events is only 17%.

Given these findings, I think the price discovery process is different for scheduled than unscheduled events, not only because the latter has more of a surprise element to it, but also due to when in time these events typically occur.

More on this topic is available in my latest research study: Event Trading Using Market Response.