Investigating tradable signals on Australian index futures using pre-open market data

Abstract

This paper aims to investigate information learning on index futures in the Australian Securities Exchange (ASX) pre-open period to determine potential trading strategies. The paper will build upon price discovery and Walrasian auction literature in an adjacent manner by using the processes to find tradable signals. Using disseminated information in the order book, it is possible to construct demand and supply curves from cumulative bid and ask orders. From this once can extract a clearing price, trading volume, demand and supply elasticities and trading imbalance. To do this, the ASX auction process and algorithm will be interpreted and replicated. We then examine, through multiple types of regressions, if these factors or any derivative factors can predict price movement after open. The paper concludes that the sum of elasticities and the price change prior to open have significant predictive power and profitable trading strategies are formed.