Market Making and Reversal on the Stock Exchange

Abstract

The accurate record of stock market ticker prices displays striking properties of dependence. We find for example that after a decline of 1/8 of a point between transactions, an advance on the next transaction is three times as likely as a decline. Further examinations disclose that after two price changes in the same direction, the odds in favor of a continuation in that direction are almost twice as great as after two changes in opposite directions. The dealer (specialist) in a stock typically quotes the market by announcing the highest buy order and lowest sell order carried on his book. But these orders tend to be concentrated at integers (26, 43), halves , quarters and odd eighths in descending preference. This non-uniform distribution of orders produces some non-random effects in stock price motion. These properties of the stock market are typical of markets in many second-hand goods.