How Can I Profit Using TMIV？Opportunities for Non-High Frequency Traders

EXAMINING THE IMPACT OF ORDER INFORMATION ON STOCK PRICES

CMD Laboratory Inc.

CHAPTER 1

1.1. Understanding OB Balance

　In the previous report “Results of TSE Market Impact View Trading Simulation,” we sought out profitable trading opportunities by focusing on changes in book depth (i.e. changes in OB Bal-ance) in the context of very short-term day trad-

ing in which positions are taken and reversed within a few minutes. In this chapter we investi-gate the impact that the same signal (described below) has on price trends throughout the day.

Contents

1. Understanding OB Balance2. Returns on Closing Price

Figure 1.1: Results of Intraday Timing Analysis for Komatsu Ltd. (6301) on March 3, 2013

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Analysis of Intraday Trading Using TMIV to Time Executions

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Trading Signal (excerpt from previous report)Whenever the change in OB Balance exceeds a selected threshold value (e.g. 2.5) in a positive (negative) direction, the stock is bought (sold). However, as OB Balance may move erratically due to noise gen-erated by events such as algorithmic trading, no trades are made if the sign of the OB Balance value before and after the change is different (i.e. changes from positive to negative or negative to positive).

Fig. 1.1 on the last page and the figures below provide illustrative examples of this trading signal. The blue triangles signify sell sig-nals and the red triangles signify buy signals. While not true in every case, buy signals tend to appear when the stock price is rela-tively low and sell signals tend to appear when the price is rela-tively high.

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Fig. 1.2: Sony, 2013/3/11　　　　Fig. 1.3: Kao, 2013/3/8　

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Fig. 1.4: Komatsu, 2013/2/15 Fig. 1.5: Hokuto, 2013/1/22　

1.2. Returns on Closing Price

　Fig. 1.6 to Fig. 1.9 show the results of a trading simulation using these signals conducted from January 2012 to March 2013. The graphs show the monthly returns for each issue shown in the previ-ous section using closing price as the base for calculating daily re-turns. The threshold used to determine the buy and sell signal for each stock was fixed over the entire period. The fact that the cumu-lative return for each stock was positive showed that the effect of changes in Order Book Balance on stock prices persists over the long term, and indicates the possibility that profit opportunities ex-ist using this information.* Similar results were obtained using time-weighted average price (TWAP) as the base for calculating daily returns.

　Fig. 1.6: Sony Fig. 1.7: Kao

　Fig. 1.8: Komatsu Fig. 1.9: Hokuto

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CHAPTER 2

2.1. Previous Analysis of OB Balance

　The previous report entitled “Market Analysis Using TSE Market Impact View [TMIV]” pre-sented an analysis of changes in order book depth (i.e. changes in OB Balance) versus subse-quent stock price fluctuations. In the report, we showed that, in terms of intraday order and stock price fluctuations, profit opportunities were observed for the majority of stocks (80 out of the 100 stocks for which TMIV data is avail-able) when using changes in OB Balance as a trade timing indicator.

　This chapter takes this analysis one step fur-ther by focusing on the effect of order informa-tion on not only subsequent price changes in an immediate sense (the previous report used a time-frame of five minutes), but also price changes in a much broader sense. Specifically,

① The relationship between order volume and inter-day price fluctuations

! We conduct an analysis of stock price fluctua-tions on a day-to-day basis by focusing on “Reference Volume” (explained in the next

section), which is a data value provided within TMIV.

② Intra-day trade timing! We then turn to OB Balance changes as a

trade timing indicator, and conduct an analy-sis of the relationship with both TWAP and closing price.

Based on these two analyses, we illustrate below that order book data provides valuable informa-tion not only in terms of very short-term trading, but also in terms of intra-day and inter-day price fluctuations.

2.2. Effective Order Volume (Reference Volume)

　The order volume displayed in the order book continually fluctuates throughout the day. Get-ting a firm grasp of valid, executable order vol-ume has become particularly difficult with the introduction of the next-generation arrowhead trading system in Jan. 2010, which has enabled electronic order information to flow on a millisec-ond scale (i.e. making definite executions is im-possible with the order book changing every mil-lisecond). Rather than compiling the entirety of

Contents

1. Previous Analysis of OB Balance

2. Effective Order Volume (Reference Volume)

3. Order Volume, Execution Volume and Stock Prices

Order Volume Also Affects Inter-Day Price Fluctuations

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this order data, TMIV calculates real volume in the order book by taking a sample every five seconds throughout the day. The “Refer-ence Volume” indicated by the yellow box in the upper right-hand corner of the Individual Stock Analysis Screen shown in Fig. 2.1 is defined as “10% of the average of immediately executable volume (i.e. within 2x the day’s quote parameter) recorded every five sec-onds throughout the previous trading day.” In other words, 10% of the effective order volume appearing on the book.

Fig. 2.1: Reference Volume As Shown on the Individual Stock Analysis Screen

2.3. Order Volume, Execution Volume, and Stock Prices

　Fig. 2.2 illustrates trends in two sets of data: 1) reference volume for the 101 stocks for which TMIV data is available compared with the executed volume of all shares listed on the TSE 1st section, us-ing a base date of Dec. 28, 2012 and a base value of 100; and 2) the

average stock price of the same 101 TMIV stocks compared with the TOPIX index, using the same base date and a base value of 1000.

Fig. 2.2: Order Volume, Execution Volume, and Stock Prices (Base Date: Dec. 28, 2012)

A quick glance at Fig. 2.2 gives the impression that there is a strong correlation between executed volume (purple line) and price move-ments (red and blue lines), but looking more closely at the change in each reveals that this is not necessarily the case. Fig. 2.3 and Fig. 2.4 plot the change in price (i.e. rate of change in the TOPIX index) versus the change in order volume and change in executed vol-ume, respectively. Comparing these two plots reveals that, while slight, changes in order flow correlate more closely with changes in price than do changes in executed volume. The slope of the regres-sion line is steeper for order volume change versus price change than for execution volume change versus price change (note that we cannot say definitively that the impact of order volume is al-ways larger, but only that the steeper slope indicates that, on aver-age, the level of impact is larger).

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　In conclusion, these results indicate that an analysis resulting in more valuable information may be possible by focusing on the rela-tionship between order volume and price movements.

Fig. 2.3 Changes in Order Volume and Price Fluctuations

Fig. 2.4 Changes in Executed Volume and Price Fluctuations

DISCLAIMERThe information provided in this report is for informational pur-poses only and is not intended as investment solicitation or recom-mendation of any particular securities company. TSE Market Im-pact View is an information product developed by Tokyo Stock Ex-change, Inc. in collaboration with CMD Lab, Inc. Tokyo Stock Ex-change Inc. and CMD Lab, Inc. shall bear no responsibility whatso-ever in the unlikely event that some loss is incurred based upon the content of this report. While the utmost effort is exerted in en-suring the completeness of this report, it makes no guarantee with regards to such. While this report contains information/commentary on TSE Market Impact View, it does not encompass the entire contents of the product. The information contained in this report may be altered without prior notification. The informa-tion contained in this report indicates past results and is no indica-tion of future performance. CMD Lab, Inc. retains all rights with respect to all parts of this report and prohibits duplication, trans-mission, etc. for any purpose and through any method (electronic or mechanical).

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