Econometrica: Jan 1965, Volume 33, Issue 1

The Dynamics of Stock Trading<88:TDOST>2.0.CO;2-L
p. 88-113

M. F. M. Osborne

The New York Stock Exchange is characterized as a black box with an input of orders and an output of executed prices. Feedback, or coupling between the output and input, is determined by the standard types of orders, and the time delay between the receipt of information on prices, the output, and the decision to enter an order as input. From this picture plus the knowledge that the distribution in time of orders has the characteristic of concentrated bursts, the price output is described by a random sequence of starting transients of the form [email protected] with @l real, complex, or imaginary. It is quite essential to the description of the trading process to take account of its discrete, rather than continuous, nature in both price and time. The conclusions from the theory are in qualitative agreement with the "folklore" of stock trading.

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