26 votes
Accepted

What mathematical theory is required for high frequency trading?

Hah! There is no such thing as the “rigorous mathematical underpinning” of high frequency trading - because HFT, like all trading, is not primarily a mathematical endeavour. It’s true that many ...
user avatar
  • 5,603
21 votes

Quantitative Math required for Market-making?

The primary quant skill needed to make the market is optimal control (a typical paper is Guéant, O., L, and J. Fernandez-Tapia (2013, September). Dealing with the inventory risk: a solution to the ...
user avatar
  • 10.5k
17 votes
Accepted

Backtesting Market Making Strategy or Microstructure Strategy

This is a very difficult question. First of all you should read Almgren's slides on the topic: Using a Simulator to Develop Execution Algorithms. First you need to backtest your strategy against a "...
user avatar
  • 10.5k
16 votes

Ultra-High Frequency Trading Help

This question has been re-opened again after (rightly) being closed as too broad for the purpose of clearing some misconceptions regarding one of the answers here. The main idea that is to be ...
user avatar
  • 1,132
16 votes

What mathematical theory is required for high frequency trading?

I would argue, taking a note from John von Neumman, that quantitative finance lacks rigorous underpinnings. Von Neumann warned in 1953 that many things that look like proofs in economics and finance ...
user avatar
  • 4,066
14 votes

Market impact, why square root?

I found this power point and this paper to be an excellent source on this topic. Here is a quote from the paper: A square-root singularity for small traded volumes is highly non-trivial, and ...
user avatar
13 votes
Accepted

How are HFT systems implemented on FPGA nowadays?

Here's a way to think about it: imagine you can do something in an ASIC (i.e. directly in hardware). However, the process of fabrication is in itself expensive, and you get a design that you cannot ...
user avatar
13 votes
Accepted

Quantitative Math required for Market-making?

Successful strategies in both areas can have the same math requirement. It just depends on the algorithm. PhD level mathematics is not a requirement in either area, despite the impression you may get ...
user avatar
  • 2,084
13 votes
Accepted

HFT to blame for Flash Crashes?

Using months of proprietary data that labels participants by their participant ID, it has been found that during periods of significant volatility, the composition of HFT participants in the book ...
user avatar
  • 5,062
12 votes

Quantitative Math required for Market-making?

Unfortunately, the ability and tools to develop a low latency trading system are extremely commoditized and will be insufficient for you to make a living in this field. An overwhelming majority of ...
user avatar
  • 5,062
11 votes
Accepted

Understanding how market making helps investors

I didn't quite understand your objection. Most theories of market making are derived from a famous paper by Jack Treynor (The Economics of the Dealer Function). In the theory, there are initially no ...
user avatar
  • 9,347
11 votes
Accepted

How long do algorithmic trading strategies typically remain profitable?

Is there a typical "half-life" of a strategy? This is a really subjective question, and I don't think any singular answer will generalize well. That being said, I will give some examples ...
user avatar
  • 3,680
10 votes
Accepted

Market Making Strategy to Interact with IB API

Pete's seven year old answer is just as relevant now as it was in 2011. None of the limiting factors of their API has changed since then, so this is essentially an extensive reiteration. The ...
user avatar
  • 1,132
9 votes
Accepted

Avellaneda -Stoikov market making model

The market-maker makes a bid-ask spread $\delta$ around the reservation price $r$. So at any time, the market-maker quotes the bid price $$ p_b = r - \delta/2, $$ and the ask price $$ p_a = r + \...
user avatar
  • 949
9 votes
Accepted

Modelling queue position

No, you have to build your model empirically with data. Suppose $p(x)$ denotes the probability of cancel in front of you when your order is positioned $0 \leq x \leq 1$ through the queue, there are a ...
user avatar
  • 1,616
8 votes
Accepted

Order Book Dynamics

The Queue Reactive Model (by Huang, L and Rosenbaum) is an improvement of what Cont and de Larrard (CL) did. This model is capturing the inflows and outflows in each queue given the current state of ...
user avatar
  • 10.5k
8 votes

Infinite horizon agent in Avellaneda-Stoikov model

I'm doing this from memory, but as I recall $q_{\text{max}}$ is the maximum inventory on any side that you wish to take (otherwise you might build up a huge position if you are adversely selected). ...
user avatar
  • 235
8 votes

What are the main types of orders on an exchange?

As @chrisaycock mentioned, there's many permutations of parameters, especially when it comes to venue routing instructions, so it's hard to write an exhaustive list. But most of the time, the ...
user avatar
  • 1,616
8 votes
Accepted

Is there a HAR that deals with the leverage effect?

There exists a modification of the HAR model that accounts for leverage effect (á la GJR-GARCH) in a high-frequency setting. The semi-variance HAR model, termed the SHAR model of Patton and Sheppard (...
user avatar
  • 3,273
7 votes

What good papers of short term (<30 seconds) volatility estimation

Very interesting question. I am not an expert on the subject, however, I was able to find a collection of papers on the subject that should get you started. Here is a good and very informative paper ...
user avatar
  • 1,335
7 votes
Accepted

What kind of front end/ gui is used with trading applications?

If I was in your position I would start to research how I can create a web server is C++ and expose calls to create a REST service. In other words, can you make your code status output to HTTP? From ...
user avatar
7 votes
Accepted

What are some quantitative trading strategies used by high-frequency trading companies to make a killing on a market crash day on 24Aug2015?

On aggregate, large shops like Virtu are involved in market making strategies. There's various classes of market making strategies, and it is unnecessary to distinguish further here for the purpose of ...
user avatar
  • 5,062
7 votes
Accepted

How to calculate volatility on intraday data?

Financial modeling is often considered as a mixture of art and science. That is a way how you model your data depends on you. You can choose several approaches, for example: calculate max - min price ...
user avatar
7 votes

definition of mid price in literature

As someone who has contributed to literature, I am purposefully vague with the use of mid price. Not that I don't define it but that it is difficult to state which definition is the best in which ...
user avatar
  • 7,997
7 votes

Alternatives to RDBMS for options backtesting

My answer is similar to the one given for this other question. If you are mainly using the data for backtesting, there's very little reason to store the data in a MySQL database. The data generally ...
user avatar
  • 1,616
6 votes

Applications of Fourier theory in trading

I have created some Fourier Analysis of stocks here: http://www.gregthatcher.com/Stocks/Default.aspx I turn the raw data into a series of sines and cosines, show the Fourier approximation as a graph, ...
user avatar
6 votes

Calculating 6-minute, 20-minute, 45-minute, and 3-hour volatility

Quick summary: Your model should still be well specified, as long as: 1) You do the analysis on a heavily traded asset, e.g. IBM on NYSE, and 2) You use heteroskedasticity-consistent standard errors ...
user avatar
6 votes
Accepted

What are flickering orders?

A "flickering" order is one which is repeatedly submitted and cancelled (whether it's at the top of book or not). The answer from @chollida mentions that "the goal typically is to either slow down ...
user avatar
  • 5,603
6 votes
Accepted

Why circuit breakers can't prevent a flash crash

As a preamble. There are two types of "circuit breakers" if the price goes outside a (long term or static) corridor defined as yesterday close +/-p% (very often p is a multiple of the long term ...
user avatar
  • 10.5k
6 votes
Accepted

How to measure the Sharpe Ratio of a high frequency trading strategy?

Use daily P&L rather than return rate1. $$ Sharpe = \frac{\mu}{\sigma} $$ To annualize, multiply by the square root of the number of trading days in the year. For US equities, that would be 252. ...
user avatar
  • 9,639

Only top scored, non community-wiki answers of a minimum length are eligible