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Comment by jackgavigan | Hacker News Reader

I seem to recall that the most likely predictor of whether the next tick in a liquid market will be up or down, is whether the last tick was up or down.

In other words, if the last tick was upwards, there is a >50% chance that the next tick will be upwards too.

A quick'n'dirty Google search turned up some research: http://www.researchgate.net/publication/234834258_Random_Wal...

Looking at the ticker tracks the artist has used, I wouldn't be surprised if the rats are effectively being trained to Buy when they hear high-pitched notes, and Sell when they hear low-pitched ones.

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It's actually the other way around. For most stocks, if the last tick was upwards, the next tick is more likely to be downwards (where a "tick" is any time the best bid or ask moves, and "price movement" means the change in the mid price).

For example, taking a random stock over a random three month time period, I compute that after an uptick, the probabilities for the next tick are -

  P(uptick)    = 39.3%
  P(downtick)  = 56.3%
  P(no change) =  4.4%

where "no change" typically happens when the best bid and ask change by the same magnitude, but in opposite directions.

Of course, this is not very useful for trading, because it doesn't give you enough of an edge to overcome the bid-ask spread.

Okay, here's the breakdown of the five sample ticker tracks provided by the artist.

                                                    NR231   NR287   NR320   NR440   NR442   Totals
  Uptick followed by an uptick (UU)                    6       5       9      14       5      39
  Uptick folowed by a downtick (UD)                    2       4       3       3       4      16
  Uptick followed by no significant change (UN)        1       0       0       2       0       3
  No significant change followed by an uptick (NU)     1       1       0       2       1       5
  No significant change followed by a downtick (ND)    2       1       0       0       1       4
  Downtick followed by no significant change (DN)      2       2       0       1       2       7
  Downtick followed by an uptick (DU)                  1       4       3       0       4      12
  Downtick followed by a downtick (DD)                 8       6       8       1       6      29

There were 58 upticks in total, 39 (67.24%) of which were followed by another uptick.

There were 48 downticks in total, 29 (60.42%) of which were followed by another downtick.

There were around 480,000 ticks in my sample - who do you believe? ;)

The difference is probably in what is defined as a "tick" for the purposes of computing the stats. If you are using traded prices as opposed to quotes, for example, you will get very different results. If you sample at regular intervals (e.g. 1s) you will get different results again.

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