Hot answers tagged market-microstructure
16
The lead paper in the January 2011 Journal of Finance (Hendershott, Jones, and Menkveld) addresses algorithmic trading (AT). In short, they find that AT improves liquidity as measured by bid-offer spreads. Taking the econometrics as correct (it is in the Journal of Finance) the next question is if bid-offer spreads are a sufficient statistic for measuring ...
14
I'll take a stab at it, but this is a really broad question.
A direct answer: Bayesian models often use "probability that the counter-party is informed."
Indirect answers:
I think your assumption is that the algorithm operates on each stock individually, and has no knowledge of what it's doing in any other stock. But, it is likely that the algorithm is ...
8
This answer is my ongoing attempt to consolidate some recent commentary on this hot topic.
A good place to start for anyone thinking about this question is the Economists's Buttonwood: Not So Fast, which mentions recent research by Biais and Woolley (2011) and Dichev, Huang, and Zhou (2011).
Does Algorithmic Trading Improve Liquidity? This paper claims ...
7
Since Quant Cup 1's objective was an efficient price/time matching engine, the data structure of the winning implementation might partly be what you are looking for.
Else the setup of LOBSTER is supposed to be quick.
6
Joel Hasbrouck (imho, a leading expert in market microstructure) has a paper on this:
http://people.stern.nyu.edu/jhasbrou/Research/Working%20Papers/HS10-11-10.pdf
From the abstract:
Our conclusion is that increased low-latency activity improves traditional market quality measures such as short-term volatility, spreads, and displayed depth in the limit ...
6
DSpace@MIT - High frequency trading system design and process management (non-printable)
This thesis provides a detailed study composed of high frequency trading system design, system modeling and principles, and processes management for system development. Particular emphasis is given to backtesting and optimization, which are considered the most ...
6
Are you after the famous paper from Christie and Schultz?
Christie,W., Schultz,P., 1994. Why do NASDAQ market makers avoid odd-eighth quotes? Journal of Finance 49,1813–18 40.
From the abstract:
On May 26 and 27, 1994 several national newspapers reported the findings of Christie and Schultz (1994) who cannot reject the hypothesis that market makers ...
6
There are several. This list is from Giyenko et al (2008)---in their work they compare all these different measures--- and includes spread proxies and price impact proxies. As for spread proxies:
"Effective Tick" (Holden 2007, Giyenko et al 2008)
"Holden measure" (Holden 2007)
"LOT Y-split" (Giyenko et al 2008)
"Roll measure" (Roll 1984)
"Gibbs measure" ...
5
If you're missing ticks, then no technique will get those ticks back.
If you have two sources, then designate one source as the primary feed and then fill-in gaps from the secondary feed. Of course, you'll have to mind the timestamps when determining whether the secondary feed can be used properly.
5
This paper Dealing with the Inventory Risk. A solution to the market making problem, has a full bibliography and explains the intra day market making mechanism.
The model is made of two components:
a diffusion of the fair price (to model the market risk)
a point process (with an intensity in $A \exp -k \delta$ (where $\delta$ is the distance to the fair ...
5
Your question is very vague (e.g. what are you trying to measure, and what "tick data" do you have), but I'll give you some pointers:
In general, when people consider how prices evolve, they will tend to think about things like volatility and correlation dynamics. So I would start by defining exactly what you want to measure. The irregularity of time ...
5
In addition to Chan's Quantitative Trading, I have also found the description of trading systems in Rishi Narang's Inside the Black Box to be informative and interesting. There are a few chapters there that give some details on system development, but they are very broad overviews.
5
Normally, an order is indeed routed to a different exchange to fill at NBBO. The exchange will then levy a fee for this routing. I'm not sure how the exchange actually chooses where to route in the case of a tie; I suspect that decision is up to the exchange operator so long as the SEC agrees.
As for an ISO order, the sender is effectively taking ...
5
I don't know if you can really improve, the point of Market Making is that you don't know when you'll be executed.
It also depends a lot on the type of product you're trading, it's not the same business Market Making far from the money options (where you will never be executed but just offer a reference price and answer traders phone calls) and MM on ...
4
I just finished "High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems" by Irene Aldridge -- I think it provides a very good overview of HFT, considerations of different aspects of trading systems, and good introductions to many formulas and research.
4
Additionally I would recommend Evidence-based technical analysis by David Aronson
It explains the whole process (including the complete statistical background) of rigorously setting up the basis for your trading system.
See for a short summary of important points here: CXO Advisory
See for a review here (including some practical advice and programs how ...
4
HFT, when they implement market-making like strategies, are a key element of a fragmented market to build "arbitrage bridges" between trading venues.
There is a cost that for: we are all paying (probably around a fraction of the actual spread) to them, and the resiliency of the order books suffers because of their presence.
As usual, there are positive and ...
3
I assume, this is not for real-time display, so you can use the price from future.
If this is not the case, this answer is irrelevant.
I don't know about a standard technique, but this is my suggestion:
$p_{noise} = p_{current} + \nu * (p_{future} - p_{current})$
where $p_{future}$ is future price for some horizon, and $\nu$ is a zero-mean Gaussian noise.
...
3
It sounds like you're trying to filter your input event stream so as to reduce noise. By reducing noise you'll reduce the number of cancel/replace's you're doing and, hopefully, have a better order-to-fill ratio.
I would investigate algorithms from control theory, in particular dynamic linear models like Kalman. The problem with denoising is you want to ...
3
You have two ways to estimate your position in an order book:
first if you have access to an ITCH feed, you can recognize your order into the ITCH updates, and know exactly where you are, but you will have to build an engine to translate an order-by-order ITCH feed to a limit order book;
or you have to use estimates; the easiest way to build one is to ...
3
Obviously merging two streams is harmless and it should be done. But it's hard to advise you regarding the "interpolation" methods you can use to generate the ticks without knowing why you need this. The reason is that any method will introduce a certain bias to the data. Therefore, it very much depends on what are you going to do with your altered data on ...
3
I'm assuming that the algorithm is a black box. [You can't see any or all of the inner workings].
You would reverse engineer it like you would anything else:
Collect evidence of events [Signals to buy/sell, quantities], and the environment that it operates in.
Make theories, and then model them.
For each of the theories: Make a convincing argument for ...
3
In terms of system design, I learned the most by reading the developer guides and exchange connectivity specs for various exchanges. You probably won't be connecting to these directly, but understanding how the sessions, book updates, snapshotting works, and what events can occur is very useful.
Also, google for the Max Dama automated trading PDF, which ...
2
I have been coming across a few of these research lately.
I don't have access to it anymore but I remember reading the abstract of this article, but it's really outdated now.
After a quick look, I found this paper which is much more recent (2011) as well as this one (2010).
1
You first need to clearly define your constraints first:
max single position size
max net exposure
I am not sure why you want to limit order size. The whole idea of hft strategies is to maximize turnover. As long as your strategy generates alpha you should allow it to trade as often as the strategy prescribes. All you need to then do is to constrain the ...
1
Maybe the accepted answer to this earlier thread and the more detailed description on my blog might be of use to you. Within the FFT you could just manipulate the higher frequency components to create your synthetic microstructure noise.
1
It seems that you speak about a "quote tax". In Europe some markets now ask for fees for orders even if they are not executed if you exceed an order to trade ratio to prevent them from cpu-harrassing flows. Let s wait and see what will append.
The effect should be similar to the One of a tax.
The real question is: how can you make the difference between an ...
1
Order entry protocols allow the sender to specify how they want their order routed. Some protocols such as NASDAQ's Ouch don't support routing where as others, such as RASH, do. How the order is entered and what flags are set will dictate how the exchange handles routing.
In the case of a no route order you'll simply receive a cancel for the un-executed ...
1
Actually depends on the kind of market you are trying to make, if you are a authorized MM some markets/exchanges have special structure for market makers so they don't really pay for every quote that they send to the system, instead they pay a fixed amount of fee to have certain rights and responsibilities for a particular bin(set of instruments) of the ...
1
the liquidity story is the one all hft use when asked what they actually give back to society and weve heared it all, there is just one more dimension that hasnt been discussed so far.
high frequency trading has been expanding the last decade and the financial regulators havent been able to catch up with the developments.
The programs have inputs and ...
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