High-frequency Trading

257 Pages·2013·2.76 MB·English

by  Maureen O'Hara

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“High Frequency Trading offers a much-needed collection of complementary d
perspectives on this hottest of topics. The combined academic credentials and in
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first-hand market knowledge of the editors is probably unparalleled, and their

style of writing precise and engaging. The book is thoughtfully organized, tightly
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focussed in its coverage and comprehensive in its scope. Practitioners, academics
and regulators will greatly benefit from this work.” E
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RiccaRdo RebonaTo, Global Head of Rates and FX analytics, PiMco, ite
and Visiting Lecturer, University of oxford. d

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“This book is a must read for anyone with any interest in high frequency trading. a New Realities for Traders,
The authors of this book are a who’s who of thought leaders and academics vid
who literally did the fundamental research in the innovation, development, Markets and Regulators
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and oversight of modern electronic trading mechanics and strategies.” a
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LaRRy Tabb, Founder & ceo, Tabb Group, and Member of the cFTc le
Subcommittee on automated and High Frequency Trading. y,

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“The concept of high frequency trading too often evinces irrational fears co
and opposition.  This book, by experts in the field, unveils the mysteries, s EditEd By david EaslEy,
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records the facts and sets out the real pros and cons of such mechanisms.” ó
p Marcos lópEz dE prado,
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at the London School of economics. and MaurEEn o’Hara
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“Easley, Lopez de Prado, and O’Hara have produced a classic that everyone a
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PEFC Certified
this book has been
produced entirely from
sustainable papers that
are accredited as pEFc
compliant.
www.pefc.org
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High-Frequency Trading
New Realities forTraders,Markets and Regulators
Edited by David Easley, Marcos López de Prado and
Maureen O’Hara
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PublishedbyRiskBooks,aDivisionofIncisiveMediaInvestmentsLtd
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ISBN978-1-78272-009-6
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Contents
AbouttheEditors vii
AbouttheAuthors ix
Preface xv
1 TheVolumeClock:InsightsintotheHigh-FrequencyParadigm 1
DavidEasley;MarcosLópezdePrado;MaureenO’Hara
CornellUniversity;RCCatHarvardUniversity;
CornellUniversity
2 ExecutionStrategiesinEquityMarkets 21
MichaelG.Sotiropoulos
BankofAmericaMerrillLynch
3 ExecutionStrategiesinFixedIncomeMarkets 43
RobertAlmgren
QuantitativeBrokersLLC;NewYorkUniversityCourant
InstituteofMathematicalSciences
4 High-FrequencyTradinginFXMarkets 65
AntonGolub,AlexandreDupuis,RichardB.Olsen
OlsenLtd
5 MachineLearningforMarketMicrostructureand
High-FrequencyTrading 91
MichaelKearnsandYuriyNevmyvaka
UniversityofPennsylvania
6 A“BigData”StudyofMicrostructuralVolatilityin
FuturesMarkets 125
KeshengWu,E.WesBethel,MingGu,DavidLeinweber,OliverRübel
LawrenceBerkeleyNationalLaboratory
7 LiquidityandToxicityContagion 143
DavidEasley;MarcosLópezdePrado;MaureenO’Hara
CornellUniversity;RCCatHarvardUniversity;
CornellUniversity
8 DoAlgorithmicExecutionsLeakInformation? 159
GeorgeSofianos,JuanJuanXiang
GoldmanSachsEquityExecutionStrats
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HIGH-FREQUENCYTRADING
9 ImplementationShortfallwithTransitoryPriceEffects 185
TerrenceHendershott;CharlesM.Jones;AlbertJ.Menkveld
UniversityofCalifornia,Berkeley;ColumbiaBusinessSchool;
VUUniversityAmsterdam
10 TheRegulatoryChallengeofHigh-FrequencyMarkets 207
OliverLinton;MaureenO’Hara;J.P.Zigrand
UniversityofCambridge;CornellUniversity;LondonSchoolof
EconomicsandPoliticalScience
Index 231
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About the Editors
DavidEasleyistheHenryScarboroughprofessorofsocialscience,
professorofeconomicsandprofessorofinformationscienceatCor-
nellUniversity.HeservedaschairoftheCornelleconomicsdepart-
mentfrom1987to1993and2010to2012.HeisafellowoftheEcono-
metric Society and has served as an associate editor of numerous
economicsjournals.Davidrecentlyco-authoredthebookNetworks,
CrowdsandMarkets:ReasoningAboutaHighlyConnectedWorld,which
combines scientific perspectives from economics, computing and
informationscience,sociologyandappliedmathematicstodescribe
theemergingfieldofnetworkscience.
MarcosLópezdePradoisheadofquantitativetradingandresearch
atHETCO,thetradingarmofHessCorporation,aFortune100com-
pany. Previously, Marcos was head of global quantitative research
atTudorInvestmentCorporation,wherehealsoledhigh-frequency
futurestrading.Inadditiontomorethan15yearsofinvestmentman-
agementexperience,Marcoshasreceivedseveralacademicappoint-
ments, including postdoctoral research fellow of RCC at Harvard
University,visitingscholaratCornellUniversity,andresearchaffil-
iateatLawrenceBerkeleyNationalLaboratory(USDepartmentof
Energy’sOfficeofScience).Marcosholdstwodoctoratedegreesfrom
Complutense University, is a recipient of the National Award for
Excellence in Academic Performance (Government of Spain), and
wasadmittedintoAmericanMensawithaperfecttestscore.
MaureenO’HaraistheRobertW.Purcellprofessoroffinanceatthe
JohnsonGraduateSchoolofManagement,CornellUniversity.Her
researchfocusesonmarketmicrostructure,andsheistheauthorof
numerousjournalarticlesaswellasthebookMarketMicrostructure
Theory.Maureenservesonseveralcorporateboards,andischairman
oftheboardofITG,aglobalagencybrokeragefirm.Sheisamem-
ber of the CFTC-SEC Emerging Regulatory Issues Task Force (the
“flashcrash”committee),theGlobalAdvisoryBoardoftheSecuri-
tiesExchangeBoardofIndia(SEBI)andtheAdvisoryBoardofthe
OfficeofFinancialResearch,USTreasury.
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About the Authors
RobertAlmgrenisaco-founderofQuantitativeBrokers,whichpro-
videsagencyalgorithmicexecutionandcostmeasurementininterest
ratemarkets.HeisaFellowinthemathematicsinfinanceprogram
atNewYorkUniversity.Until2008,Robertwasamanagingdirector
andheadofquantitativestrategiesintheelectronictradingservices
group of Banc of America Securities. From 2000 to 2005 he was a
tenuredassociateprofessorofmathematicsandcomputerscienceat
theUniversityofToronto,anddirectorofitsMasterofMathemati-
calFinanceprogram.Hehasanextensiveresearchrecordinapplied
mathematics,includingpapersonoptimaltrading,transactioncost
measurementandportfolioconstruction.
E. Wes Bethel is a senior computer scientist at Lawrence Berkeley
National Laboratory, where he conducts and manages research in
the area of high performance visualisation and analysis. He is a
member of IEEE and a Distinguished Scientist of the Association
forComputingMachinery.HehasaPhDincomputersciencefrom
theUniversityofCalifornia,Davis.
AlexandreDupuishasworkedatOLSENsince2006andisheadof
thequantitativeresearchunitRomandy.Hisfocusliesinresearching
anddevelopingtradingmodelsaswellascreatingrisk-management
tools. Alex is a member of the risk-management team where he
controls a third of the investment portfolio. In collaboration with
universities,hesupervisesPhDstudentsinthefieldofquantitative
finance.AlexholdsaPhDincomputersciencefromtheUniversity
of Geneva and has gained further research experience by working
attheUniversityofOxfordandatETH.
Anton Golub has worked at OLSEN since the summer of 2012 as
a member of the research team. He performs research in the field
of market micro-structure, leveraging the methodology developed
at OLSEN. Anton previously worked at the Manchester Business
School as a researcher on high-frequency trading, market micro-
structure and flash crashes. In 2012, he was invited to participate
in an international project on computerised trading funded by the
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