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High-Frequency Trading: A Practical Guide to - Trading Software. Pages · · MB · 4, Downloads ·English. by Aldridge, Irene. High-Frequency Trading (eBook, ePUB) - Aldridge, Irene . Dieser Download kann aus rechtlichen Gründen nur mit Rechnungsadresse in A, D ausgeliefert. Irene Aldridge - High Frequency Trading A hands-on guide to | EPUB | pages | 4 MB The book also includes a companion Website where selected sample trading strategies can be downloaded and tested.
But solid footing in both the theory and practice of this discipline are essential to success. Whether you're an institutional investor seeking a better understanding of high-frequency operations or an individual investor looking for a new way to trade, this book has what you need to make the most of your time in today's dynamic markets. Building on the success of the original edition, the Second Edition of High-Frequency Trading incorporates the latest research and questions that have come to light since the publication of the first edition. It skillfully covers everything from new portfolio management techniques for high-frequency trading and the latest technological developments enabling HFT to updated risk management strategies and how to safeguard information and order flow in both dark and light markets. Includes numerous quantitative trading strategies and tools for building a high-frequency trading system Address the most essential aspects of high-frequency trading, from formulation of ideas to performance evaluation The book also includes a companion Website where selected sample trading strategies can be downloaded and tested Written by respected industry expert Irene Aldridge While interest in high-frequency trading continues to grow, little has been published to help investors understand and implement this approach—until now. This book has everything you need to gain a firm grip on how high-frequency trading works and what it takes to apply it to your everyday trading endeavors.
All are characterized by low latency and infrastructures and automated order management. But, electronic market making and algorithmic trading are both activities which are legitimate elements of market structure and help asset managers to achieve best execution for clients. In particular, HFT is not solely, or even primarily, characterized by passive market making strategies that employ liquidity providing orders that rest on order books and can be accessed by others.
As the reader goes through these, it is helpful to keep in mind the aforementioned caveats on the disparate range of HFT strategies and the limitations of HFT research. In addition, although the critical arguments outnumber the supportive arguments, one should not necessarily interpret this to mean that HFT criticism trumps supportive HFT arguments; individual supportive arguments such as market quality include several key market attributes that contribute to the overall quality of a securities market.
In turn, the level of market quality can have significant monetary implications for investors. The bid-ask spread of a security is essentially the difference between the price investors are willing to pay for it and the price other investors are willing to sell it for. Theoretically, lowered bid-ask spreads should reduce the costs of trading for all investors.
Liquidity describes an investor's ability to promptly purchase or sell a security while having a minimal impact on its price.
Price discovery is the process by which the value of a security is established through market supply and demand dynamics. Surveys of empirical research suggest that in both equity and foreign exchange markets, HFT appears to have narrowed bid-ask spreads, bolstered market liquidity, reduced some measures of price volatility, and improved the price discovery process.
This process could arguably help detect price anomalies and help stabilize prices. However, correlation is not necessarily causation; various changes in the equity market structure, including developments such as decimalization, Regulation NMS, and the general expansion in computer technology during the period likely also contributed to these improvements, and it is hard to disentangle their individual roles. Volatility refers to the frequency and magnitude of asset fluctuations.
A major concern with heightened market volatility is that it fosters investor uncertainty and erodes market confidence. Noting that some HFT strategies are designed to profit from volatile markets, research found that there have been historical instances in which HFT appears to have helped reduce volatility when interacting with volatile markets.
Such a dynamic was reportedly observed during the particularly volatile months of September and October Concerns have been raised about the rapidity of trading in today's securities market and how such fast speeds may reduce market transparency for traders. Using data from a robust market-data feed system known as Midas, a staff official with the SEC's Office of Analytics and Research Division of Trading and Markets observed that HFT may not be pushing the securities market to move at a problematically fast rate.
According to the official, the data suggest that investors are generally able to access even the most short-lived quotes.
Although the general tendency is to associate HFT-related strategies with the sell side, the analysis reportedly suggested to the SEC that the more traditional buy side was becoming at least as complex in trading patterns as the sell side firms involved in HFT.
This provides a counterpoint to the narrative in Flash Boys and other observations that HFT significantly disadvantages institutional investors. Some observers are concerned that overall market liquidity could deteriorate if HFT firms were to quickly and unexpectedly incur large losses. An attendant worry is that the liquidity provided by high-frequency trades is often not qualitatively comparable to the liquidity provided by traditional market makers.
The high-frequency trades are said to generally lack depth because of the relatively small size of HFT quotes offers to buy or sell certain securities and the fact that HFT firms have no affirmative market-making obligation. The study found that HFT traders provide liquidity when spreads tend to be wide, demand liquidity when spreads tend to be narrow, and generally smooth out liquidity over the long run.
A separate criticism of HFT is that the liquidity provided is often fleeting and has been alternatively dubbed "phantom liquidity" or "flickering quotes. As a consequence, the available liquidity for given securities may often be less than what appears to be the case.
Some institutional investors are said to have difficulties evaluating whether or not posted liquidity is transient. Such challenges have led to concerns that HFT may have helped increase the total trading costs of institutional investors.
It argues that elevated cancellation rates reflect robust competition between market makers, including HFT firms, that are simply vying for trade execution priority as part of the securities trade price determination process.
After evaluating these findings, the official suggested there were several potential takeaways, including 1 the speed of canceled orders and the speed of executed trades have been relatively aligned, 2 the degree to which stock exchanges and non-dark pool ATSs have been dominated by HFT may have been overstated by some, and 3 regulation aimed at reducing high cancellation rates would also have to reduce the trading speeds of liquidity "takers.
Front-running is a form of illegal insider trading. CRS Report RS, Federal Securities Law: Insider Trading pdf , by [author name scrubbed], observes that insider trading in securities may occur when a person in possession of material nonpublic information about a company trades in the company's securities and makes a profit or avoids a loss.
One provision of the Act requires the disgorgement of short-swing profits by named insiders.
This is because the SIP feed is unacceptably slow When an order is placed, it takes some time to be reflected in the NBBO. But that order is already in the market before the HFT can see it, even on the direct feed, by definition. HFTs never know what a customer's order is before it's in the market. HFTs have no customers. HFTs cannot front-run anyone. This sounds like front-running, in which a broker buys or sells before execution of a client's order to take advantage of a more favorable price One way in which high-frequency traders try to gather information about the flow of orders is by "pinging" different markets.
That means a firm sends multiple orders out into the markets to determine whether any will be filled, which can give an indication of the direction of a stock Can this be the basis for pursuing charges against high-frequency trading firms?
The problem with proving market manipulation is that the government must show intent to either artificially affect stock prices or to defraud others. High-frequency traders send out orders to learn the best price so they can trade ahead of others, not necessarily to drive the price up or down.
In fact, they usually do not want the price to move until after they have traded. Proving intent to defraud requires purposeful or reckless conduct to deprive the victim of property. That standard would be difficult to prove when an algorithm makes the investment decision in the blink of an eye and the firms have no real interest in the underlying value of the companies whose shares they trade. HFT firms often pay for the right to access two pieces of technology for market trading centers like the NYSE, Nasdaq, and BATS: 1 direct access to market center overall trade data and 2 being able to locate a trader's servers in close proximity to a market center's trade order dissemination servers, known as colocation.
Colocation permits HFT traders to minimize transmission times through paying securities exchanges for the right to place their servers in the same data centers in which an exchange's or an ECN's market data systems are located. This is said to enable HFT firms to reduce the data transmission time between their own technology systems and the systems operated by the market centers. By some accounts, the pairing of direct access feeds with colocation can provide HFT traders with a fraction of a microsecond advantage over conventional traders that depend on the CTA feeds.
Some argue that an advance information advantage of just a fraction of a microsecond can be "enough to get a better price, even for a later-placed order. Still others argue that "the cost-benefit tradeoff for investing in these tools and capabilities is likely to be much more favorable to organized, institutional, strongly capitalized high-frequency traders, given that the proportional increase in HFT profits from minute improvements in trading speed is potentially far greater across very large volumes of trades per day rather than for long-term, low-frequency investors.
The order types give HFT traders different ways to interact with the securities market and, as one trader from an HFT firm reportedly said, such customized trading protocols "optimize the order type for a given trade…. A NYSE official, however, reportedly acknowledged that "we're always competing for market share, so we try to create products that will attract more volume.
We listen to clients and see how orders can help their execution strategy. The order types are apparently often combined, so thousands of order types are said to effectively exist. In April , Haim Bodek, a former HFT practitioner and now a critic of the order types, praised the industry for what he sees as moving in the right direction with respect to the order types.
He observed that market centers "have been cleaning up their act, tweaking order types combinations to remove problems, and expected them to have eliminated all perverse orders by the end of Another criticism is that HFT firms may engage in potentially manipulative strategies that involve the use of quote cancellations. FINRA, the frontline broker-dealer regulator, has observed that although many HFT strategies are legitimate, some are not and may be used for manipulative purposes.
Given the scale of the potential impact these practices may have, the surveillance of abusive algorithms remains a high priority for FINRA Examples of this activity reportedly include layering and spoofing strategies. The aim is to create artificial levels of supply and demand that drive the price of stock up or down.
After this, "genuine" orders are transacted that benefit from the artificially inflated or reduced securities prices. HFT firms allegedly hope that during spoofing the size of the sell orders will scare other traders into selling at a low price, potentially enabling the HFT firm to profit from the bargain prices.
The causes and effects of spoofing are said to be similar to certain human-based market manipulations such as pump-and-dump and bear raid schemes.
However, detecting spoofing is said to be both difficult and complicated. Among other things, Flash Boys alleges that HFT tends to profit at the expense of small investors: The simple retail stock market order was, from the standpoint of high-frequency traders, easy kill. When, say, Fidelity Investments sent a big stock market order to Bank of America, Bank of America treated that order as its own—and behaved as if it, not Fidelity, owned the information associated with that order.
Inside the dark pool, the bank could trade against the orders themselves, or they could sell special access to the dark pool to high frequency traders. Blackrock, the nation's largest buy side firm, spoke to that issue, stating that small or retail investors are generally not affected by HFT: "[F]or virtually all retail investors, we expect there should be no negative impact on their trades from HFT; small orders will under normal market conditions get filled immediately at the NBBO.
Instead, the vast majority of such orders are said to be filled internally within large wholesalers, including UBS, Citadel, KCG formerly Knight Capital Group , and Citigroup, in a process called internalization. Internalizers' algorithms are said to generally be in competition among themselves to capture those orders and then match them internally. The internalizers are thus able to avoid paying fees for sending the orders to exchanges, savings which are reportedly passed on to the retail investor.
The fee had a disproportionately large effect on the activity level of high-frequency traders because they transmit more messages than do other traders. The study's authors concluded that retail investors saw their aggregate transaction costs remain unchanged, although their intraday trading losses grew with the presumed fall in HFT activity.
By contrast, "buy and hold" investors that trade sparingly are less likely to be affected by HFT, according to this study.
However, it is important to note that many retail investors interact with the market via institutional investors such as pension and mutual funds. The extent to which retail purchasers in mutual funds and pension funds may be affected by HFT is addressed below during the discussion of the impact of HFT on institutional investors. This report has discussed the use by HFT firms of liquidity detection strategies particularly aimed at buy side firms, tactics that some have described as predatory.
A micro market structure analysis of HFT by Baron, Brogaard, and Kirilenko identified four basic types of HFT trading counterparties: 1 fundamental traders, said to likely be large institutional investors; 2 non-HFT market makers; 3 small traders, said to likely be retail traders; and 4 opportunistic traders, said to likely be arbitrageurs, small asset managers, and hedge funds.
Among other things, the study found that on a per contract basis, the fundamental traders incurred the least cost to HFT and small traders incurred the most. More broadly, institutional investors' exposures to HFT may vary, with index mutual funds likely among some of the least affected. Institutional investors' perceptions on how HFT affects them can also vary. For example, in , the ConvergEx Group LLC, which provides brokerage and trading-related services, surveyed people who work for money managers such as mutual funds, hedge funds, broker-dealers, and banks with regard to their views of HFT.
Media sources report the views of officials at the buy side firm on the direct impact of HFT: We think it helps us. It seems to have reduced our costs and may enable us to manage more investment dollars.
Maybe something other than HFT is responsible for the reduction in costs we've seen since HFT has risen to prominence, like maybe even our own efforts to improve…. One of the biggest headline-grabbing worries about HFTs is how fast the trades are conducted. The speed sounds unnecessary, dangerous and possibly nefarious. Some of the loudest complaints about high-frequency trading come from the slower traders who used to win the races.
While we like HFTs on balance for reducing our clients' trading costs, some may push the envelope at times. Some of them may negotiate advantages that might be bad for markets. Worse, these arrangements tend to be little understood by the broader range of market participants. The nation's largest buy side company, asset manager Blackrock, observed, HFT is difficult to distinguish from computer-based trading tools such as algorithms or smart order routers which are used by market participants to execute orders for institutional and retail investors.
These practices constitute market abuse and should be treated as such in law. However, "high frequency trading" encompasses a wide variety of trading strategies and care must be taken to differentiate predatory practices from practices that benefit end-investors. For example, "electronic market making" is a type of HFT that brings tangible benefits to our clients through tighter spreads and by delivering intermediation in a fragmented trading landscape. The survey then observed that such strategies can potentially exacerbate institutional investor transaction costs and contribute to extreme volatility events.
As noted earlier, in the study that looked at the impact of the imposition of messaging fees on the Toronto Stock Exchange, the fees appear to have disproportionately curbed HFT. However, the study found that neither the aggregate transaction costs nor intraday returns of institutional traders were significantly impacted by the trading slowdown.
However, it did not distinguish between the effects of aggressive and passive HFT. HFT may diminish investors' confidence in the markets. Such concerns were illustrated in a letter released by officials at the Charles Schwab Corporation, a major securities brokerage firm, which described HFT as "undermining investor confidence in the fairness of the markets. This survey is a big one—responses from more than 4, households in the latest poll—and it doesn't take much to be counted as a stock-market participant.
If one owns individual stocks, equity mutual funds or exchange-traded funds, hybrid funds or variable annuities, that person is grouped in the stock-ownership category. Yet equity ownership in the U. The number of stock-owning households has dropped from 57 million back then to 54 million last year. More tellingly, the proportion of equity-owning households has tumbled from 53 percent to 44 percent, meaning investors clearly are in the minority.
Many factors might explain this disconnect. One is that the population is graying and thus should be getting a bit more risk-averse. Also, some people likely have had to tap into their investment portfolios because of job losses or employment uncertainty. Others have focused on repairing their personal balance sheets by paying down debt.
A February  survey of affluent investors by Wells Fargo Private Bank found widespread wariness even among this well-off group. One-fifth of the respondents indicated 'nothing would get them to add more stocks to their portfolio,' said Dean Junkans, chief investment officer for the private bank, in a statement.
Only 15 percent of respondents said they 'trust' the stock market in a recent poll of consumer confidence by the University of Chicago and Northwestern University. People are two and half times more trusting of banks. A case in point was the 60 Minutes segment … about the stock market being rigged by firms that practice ultra high-speed, high-frequency trading…. Along with the macroeconomic issues, what we saw was a market of intense volatility where Main Street investors, who number 90 million strong, pulled their money out of equities and either put it in their mattresses or into low-yielding instruments.
While a number of factors were at play, the growing role of high-frequency trading and its ability to take advantage of the volatility and inefficiencies in the market cannot be dismissed.
Some research has concluded that algorithmic trades in general tend to be correlated, which suggests that some HFT strategies may not be as varied as those employed by human traders.
A potential concern here is that because of this correlation, shocks that hit a small number of very active HFT traders could detrimentally affect the entire market. Another criticism is that independent HFT traders that are not part of larger conglomerates are often described as being lightly capitalized, a factor that could exacerbate their financial risk.
Additional concern exists that the ability of many HFT traders to handle the corresponding counterparty risk in such scenarios could be challenged because these traders tend to turn over their positions many times a day and securities trade clearing systems tend to operate at a much slower rate.
In combination, these aspects of HFT have led to concerns that under certain scenarios the firms could help generate systemic market disruptions. In Flash Boys, while exploring the significant role played by HFT, Brad Katsuyama, a securities trader and a principal figure in the book, claimed that "the stock market at bottom is rigged. Instead, this new beast [HFT] rose up … and the tax increased by billions of dollars.
The markets—the U. That—you know, that's not to say they're perfect. For larger traders, the effects are more ambiguous.
They also benefit from smaller spreads, but they can be disadvantaged by the front running by HFT firms. Among these institutional investors are fund providers such as mutual funds and exchange traded funds. To the extent that front running results in additional trading costs, this activity could cause a drag on fund returns, and thus small retail investors those investing in those funds can share in this pain as well.
There has not been sufficient research on high-frequency trading to give a definitive answer to whether or not the benefits of smaller spreads outweigh or are outweighed by the costs of front running, so it is difficult to identify the net effect of HFT. However, calling markets "rigged" seems a bit extreme. Who are the region's entrepreneurs? They tend to be middle-aged males with secondary and, often, tertiary education who represent only a small segment of the economically active population in the six countries considered in this book.
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