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 ...
  • 5,658
19 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 "...
  • 10.9k
17 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 ...
  • 4,119
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 ...
  • 1,152
15 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 ...
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 ...
  • 5,080
11 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 + \...
  • 994
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 ...
  • 3,890
10 votes
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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 ...
  • 9,700
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 ...
  • 1,152
9 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 (...
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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 ...
  • 1,968
9 votes
Accepted

Daily realized volatility and true daily volatility

To keep it brief: the realized variance estimator, $RV_t$, is only a consistent estimator of Quadratic Variation (QV) under absence of microstructure noise. Following the paper of Barndorff‐Nielsen, O....
  • 3,968
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 ...
  • 10.9k
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). ...
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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 ...
  • 1,968
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 ...
  • 1,335
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 ...
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 ...
  • 8,139
7 votes
Accepted

Beginner to high-frequency trading

My advice would be to read some books. To start with: Algorithmic Trading and DMA: An introduction to direct access trading strategies, by Johnson Market Microstructure in Practice, 2nd edition by L ...
  • 10.9k
7 votes
Accepted

Formerly profitable algorithmic trading strategies?

Take a look at compilations such as 151 Trading Strategies. I wouldn't expect this information to be widely disclosed. After all, a non-profitable strategy is a supermartingale which means there is an ...
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 ...
  • 1,968
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, ...
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 ...
6 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 ...
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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 ...
  • 5,658
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 ...
  • 10.9k
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. ...
  • 9,711
6 votes

Market impact, why square root?

My understanding (devoid of any mathematical grounding) is as follows. v = Turnover PER UNIT TIME n = Shares you need to execute therefore ...
  • 329
6 votes

Insoluble Enigma

Your question is too broad to give anything but a very general answer. Data mining in the raw form won't do any good. At the minimum, you will pick up thousands of spurious correlations. You cannot ...
  • 4,119

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