46 votes

What is an efficient data structure to model order book?

The specifics depend on if you're implementing for equities (order-based) or futures (level-based). I recommend https://web.archive.org/web/20110219163448/http://howtohft.wordpress.com/2011/02/15/how-...
22 votes
Accepted

Red Black Trees for Limit Order Book

Why do people suggest using red black trees/balanced binary trees for the levels in a limit order book? Because people are unoriginal and keep referencing the same blog post. Why are they ...
  • 1,820
19 votes
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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 "...
  • 10.7k
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 ...
12 votes
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Orderbook Arbitrage

A public order book gives traders information not only on the current price of a security, but also the volume and structure of the entire supply and demand schedule. Such information can be used for ...
  • 286
11 votes
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Why would an exchange choose one matching algorithm over another?

Among matching rule, do not forget "auction calls", in most markets, you have one at the open and one at the close. To give you the main reasons to use one matching engine rather than another: ...
  • 10.7k
11 votes

What is an efficient data structure to model order book?

I recently stumbled upon this question after needing to do this to do some real-time microstructure analysis and have taken a look at the various possible implementations. Here are some of the pros/...
11 votes
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How do better informed traders apply their advantage over the others?

Example from recent memory. Right before New York open, Bloomberg posts an article saying country R's local news reported that R's government auditor said that country V has defaulted to R's loans to ...
10 votes
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What are modern algorithms for trade classification?

There are a few approaches to use trade prices and quotes to classify the aggressor as "buy" or "sell." Also, many of these methods have historically had to deal with ...
  • 2,770
10 votes

Orderbook Arbitrage

I am not sure Dark Pools (DP) have been created to avoid "market manipulation". They have been created by firms because they found an advantage to create them (see Market Microstructure in Practice, L ...
  • 10.7k
10 votes
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What are some currently open problems in market microstructure

They are a lot of open problems in market microstructure. To have an idea of the whole landscape, have a look at Market Microstructure in Practice, 2nd Edition, by L and Laruelle. I would split them ...
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9 votes
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Using market microstructure and exchange-specific knowledge to design trading strategies

I'll give examples of each: market microstructure, exchange protocols and connectivity. Private fills Probably the most well-known in the public domain is the idea of a "canary order". In ...
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8 votes
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What are the main market anomalies/inefficiencies detected in quantitative finance?

The best overview I have seen so far is this paper which lists 214 (!) factors (or anomalies if you like) on over one hundred (!) pages: Harvey, Campbell R. and Liu, Yan and Zhu, Caroline, …and the ...
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8 votes
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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 ...
  • 10.7k
8 votes

How to identify market makers in an orderbook?

You could also look at how each price level is made up. For example how is the 18 lot on the bid price 0.0995 collated. Is it a 5 lots, 5 lots, 7 lots and 1 lot. You can do this on certain exchanges ...
  • 81
7 votes

Algorithm to detect the aggressor side of a trade

The most commonly-known approach to this is described in Inferring trade direction from intraday data (1991) by Lee and Ready. You will find that the non-trivial part has to do with classifying trades ...
  • 5,081
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 ...
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7 votes

What is an efficient data structure to model order book?

I do not know in which context you want to implement a matching engine (ME). But according to me the two nice challenges in this context are: implement one in an FPGA for simulation / fast replay ...
  • 10.7k
7 votes
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Latency and Delays across Exchanges

The round-trip latency from point A to a matching engine at point B can be thought of being comprised of two components: $RTT_{total,A \rightarrow B} = RTT_{network\_transit,A \rightarrow B} + MPL_{...
7 votes
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What are the proper ways to do order book downsampling?

Two chief reasons for subsampling or using a different event space are (i) computational or spatial tractability and (ii) denoising/signal extraction. Sergei's response seems to focus on the first ...
  • 1,820
6 votes

Why do stocks fall so quickly? Technical explanations

Stock market indices fall faster than they rise, in part, due to leveraged long investors. As individual stocks fall, investors must de-risk due to margin calls, and those margin calls may need to be ...
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6 votes

Order book size limit

I am not aware on any rules preventing a too high number of entries at a limit price. Nevertheless you usually have controls for each trader id. A trader cannot have too many orders in the book or ...
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6 votes
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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 ...
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6 votes
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Reference request: Quantitative approaches to market abuse detection

I can't help as much with public literature, but I did see a talk with a member of the FINRA data science team responsible for exactly this (event link below - perhaps you can track down the speaker). ...
  • 406
6 votes
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How does one calibrate lambda in a Avellaneda-Stoikov market making problem?

(First of all, sorry to have taken so much time to see this question...) For the paper you refer to (Guéant-L-Tapia), there is a report (in French) by Sophie Laruelle about how to do it in practice: ...
  • 10.7k
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

How can we estimate new stock price after a large purchase?

Let me try to answer: I have seen how equity trades are executed at the order book level. Let's say the price of the stock is 100 (last traded price). Let's say the order book is as follows: Bids: ...
  • 5,386
6 votes
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How can we estimate new stock price after a large purchase?

There are a number of price impact models which seek to predict the bias induced on prices by trading. There are also issues with some of these models (which I will mention later). Models Probably the ...
  • 2,770
6 votes
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What does a electronic dealer track in a RFQ market?

Customers dont place limit orders or do they? No, they don't. In an electronic RFQ market, the requesting participant (presumably the "customer" you are referring to) is generally not ...
  • 1,820
6 votes

Stochastic equation in "High Frequency Trading in LoB, Sasha Stoikov and Marco Avellaneda"

First part of your question: The solution comes from solving the SDE specified in the paper and then using the moment generating function of a normal random variable. Formally, let us define the SDE ...
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