21
votes
How do firms make money from "flow trading"?
Flow trading is in spirit very similar to market making - such firms make a profit by earning a spread.
There are 3 common ways this is done. Suppose a client wants to buy 100k shares of XYZ, which ...
- 5,231
16
votes
Trading interview gambling question
An alternative approach is to size your bet to maximize your expected utility, which is assumed to be given by a function $u(w)$ of your total wealth $w$. This could be a better approach than using ...
- 5,798
14
votes
Accepted
Why are there so few published research papers that apply Deep Learning to Algorithmic Trading?
I would say that most ML methods risk overfitting and it depends very much on the asset class. The only area where more sophisticated ML methods such as deep learning appear to make a major difference ...
- 1,068
13
votes
Accepted
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 ...
- 296
13
votes
Accepted
Options Market Making Used Implied Volatility Surface
Your question is twofold
How a market maker should adjust its quotes on a vol surface with respect to his inventory?
How to adjust the vol surface when a new trade is observed on the markets?
Let me ...
- 11.4k
13
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 ...
- 4,690
12
votes
Accepted
What are the "sniffing" or "stalking" algorithms?
Sniffing (or stalking) algo indeed detects other algorithms. How does that work in practice?
Imagine the order book for a particular equity is: Bid 1 = 99 (size 10,000), Bid 2 = 98 (size 25,000), Bid ...
- 5,918
12
votes
What is C++ used for when writing code at High Frequency Trading firms?
I ran all of the research and trading at a high-frequency market making firm with well over a million lines of C++. Now I'm at Databento, where we have about 1 line of Rust for every 1.5 lines of C++ ...
- 2,318
12
votes
What is the point of mental arithmetic tests?
Years ago when I interacted by phone with floor traders at a Chicago options exchange I was very impressed by their mental skills (which I felt I didn't match). Not so much math operations (that too) ...
- 10.6k
12
votes
What is the point of mental arithmetic tests?
I'm not in the financial industry but, as a college math instructor, feel like I could share some insight. This is a type a question that we frequently need to answer regularly, so we wind up with ...
11
votes
Accepted
Trading interview gambling question
The Kelly criterion gives the fraction, $f$, of the current bankroll to bet in order to maximize the longterm growth. The criterion is given by
$$
f = \frac{bp-q}{b},
$$
where $b$ is the winnings ...
- 1,014
11
votes
Accepted
Does the Integrity of Tick Data Vary by Vendor?
whether someone looking at a tick data vendor should be evaluating the underlying quality of the data in addition to e.g. price and API capabilities.
Absolutely, you should evaluate the quality of ...
- 2,318
11
votes
Accepted
What is gamma to do with realized volatility?
I like to think about this problem graphically.
The pic below shows a call option value at some point before expiry as a function of the underlying. At the expense of stating an obvious fact, we note ...
- 5,918
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 ...
- 11.4k
10
votes
Deciding how many trades to make
As the problem is currently formulated, you have a binary decision (whether to buy the cards or not) and a single state variable (your current wealth). I'm assuming the deck is reshuffled every play.
...
- 6,864
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 ...
- 1,172
10
votes
Criteria to assess the possibility of corporate bankruptcies in U.S. equity exchange markets
Since the stock is listed on NASDAQ, you have access to fairly standard 10Q and 10K financial statements. So you can apply the analysis pioneered by Ed Altman in his Z-score paper - compare this ...
- 11.6k
10
votes
Is this how stock trading works?
In January 2020, Matteo Aquilina, Eric Budish, and Peter O’Neill from Britain's Financial Conduct Authority published this study, illustrating how "low latency" market participants can make ...
- 11.6k
9
votes
Why do Human traders make money?
First we have to clarify what we mean by profits: I think your question can only address the fact that some human traders beat the market (because you also make profit by just buying the market, e.g. ...
- 27.3k
9
votes
Accepted
Criteria to assess the possibility of corporate bankruptcies in U.S. equity exchange markets
I have been told:
Bankruptcy is very controversial Google Scholar Researchers.
You might track companies ratios (e.g., debt to equity ratio, ...
- 460
9
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 ...
- 2,318
9
votes
Accepted
Inflation effect on FX rates
Edit: adding some references (main body is untouched)
Kenneth Rogoff and Richard Meese received an incredulous reaction to their now-famous paper showing that random-walk (RW) forecasts outperform ...
- 7,639
8
votes
Is this how stock trading works?
You would definitely have some advantage. High Frequency Trading is all about speed and the fastest traders wins. Oftentimes, winner takes all.
The blog Sniper in Mahwah & friends digs into the ...
- 8,436
8
votes
What is the point of mental arithmetic tests?
I can offer a personal anecdote for why these skills are sometimes needed.
Stemming from my career as a professional trader making trades by hand--though this is far in the past and before I ran my ...
- 4,690
7
votes
Accepted
How to calculate the JdK RS-Ratio
Reading what I have, I can only offer a guess.
1: Let's say you're looking at 9 sectors compared to \$SPX on a daily chart. Foreach sector, compute relative closing price: 100 * Sector/\$SPX
2: It ...
- 86
7
votes
Accepted
Cost of rolling futures contracts
Personally I hate the term "roll cost" and prefer "roll yield" or "effect of rolling". It is not really an out of pocket cost (it involves no outlay or receipt of cash).
It has to do with contango ...
- 10.6k
7
votes
Delta One Trading business
Delta one trading desks provide synthetic exposure to their clients.
OK, so what does that mean? Delta One desks give their clients exposure to a product (stock index, ETF, or even a single stock) ...
- 2,568
7
votes
Accepted
How to check if a portfolio has momentum bias
It kind of depends what your objective is. First, momentum 'bias' isn't well-defined. Are you looking to eliminate momentum exposure for some reason? Momentum itself isn't even well-defined really: ...
- 1,608
7
votes
Accepted
Algorithmic Trading: Python vs SQL
Python has lots of excellent libraries to compute Technical indicators for you, ta and ta-lib are great. These libraries have ...
- 647
Only top scored, non community-wiki answers of a minimum length are eligible