Trading. Theory and Practice

Transcription

1 Professional Automated Trading Theory and Practice EUGENE A. DURENARD WILEY

2 Contents Preface xv CHAPTffi 1 introductiofl to Systematic Tradlns Definition of Systematic Trading Philosophy of Trading Lessons from the Market Mechanism vs. Organism The Edge of Complexity Is Systematic Trading Reductionistic? Reaction vs. Proaction Arbitrage? Two Viable Paths The Business of Trading Profitability and Track Record The Product and Its Design The Trading Factory Marketing and Distribution Capital, Costs, and Criticai Mass Psychology and Emotions Ups and Downs Peer Pressure and the Blame Game Trust: Continuity of Quality Learning from Each Other From Candlesticks in Kyoto to FPGAs in Chicago 22 PAKTONE Strategy Design and Testing CHAPTBt 2 A New Socioeconomic Paradigm Financial Theory vs. Market Reality Adaptive Reactions vs. Rigid Anticipations 33 V

3 vi CONTENTS Accumulation vs. Divestment Games Phase Transitions under Leverage Derivatives: New Risks Do Not Project onto Old Hedges Socio-Political Dynamics and Feedbacks The Market Is a Complex Adaptive System Emergence Intelligence Is Not Always Necessary The Need to Adapt Origins of Robotics and Artificial Life 45 CHARTER 3 Analogies between Systematic Trading and Robotics Models and Robots The Trading Robot Finite-State-Machine Representation of the Control System 52 CHARTER 4 Implementation ol Strategies as Distributed Agent: Trading Agent Events Consuming Events Updating Agents Defining FSM Agents Implementing a Strategy 66 CHARTER 5 Inter-Agent Communications Handling Communication Events Emitting Messages and Running Simulations Implementation Example 76 CHARTER 6 Data Representation Techniques Data Relevance and Filtering of Information Price and Order Book Updates Elementary Price Events Order Book Data Tick Data: The Finest Grain Sampling: Clock Time vs. Event Time 89

4 Contents vii 6.4 Compression Slicing Time into Bars and Candles Slicing Price into Boxes Market Distributions Representation Charts and Technical Analysis Translating Patterns into Symbols Translating News into Numbers Psychology of Data and Alerts 104 CHARTER 7 Basic Trading Strategie: Trend-Following Channel Breakout Moving Averages Swing Breakout Acceleration Trend Asymmetry The Shadow Index Trading Acceleration Mean-Reversion Swing Reversal Range Projection Intraday Patterns Openings Seasonality of Volatility News-Driven Strategies Expectations vs. Reality Ontology-Driven Strategies 125 CHARTER 8 Architecture for Market-Making Traditional Market-Making: The Specialists Conditional Market-Making: Open Outcry Electronic Market-Making Mixed Market-Making Model An Architecture for a Market-Making Desk 134 CHARTER 9 Combining Strategies into Portfolios Aggregate Agents Optimal Portfolios Risk-Management of a Portfolio of Models 142

5 viii CONTENTS CHARTER 10 Simulatino Agent-Based Strategies The Simulation Problem Modeling the Order Management System Orders and Algorithms Simulating Slippage Simulating Order Placement Simulating Order Execution A Model for the OMS Operating the OMS Running Simulations Setting Up a Back Test Setting Up a Forward Test Analysis of Results Continuous Statistics Per-Trade Statistics 164 i Parameter Search and Optimization Degrees of Over-Fitting 167 PARTTWO Evolving Strategies CHARTER 11 Strategies lor Adaptation Avenues for Adaptations The Cybernetics of Trading 175 CHARTER 12 Feedback and Control Looking at Markets through Models Internal World Strategies as Generalized Filters Implicit Market Regimes Persistence of Regimes Fitness Feedback Control Measures of Fitness Robustness of Strategies Efficiency of Control Triggering Control Measuring Efficiency of Control 194

6 Contents ix Test Results Optimizing Control Parameters 197 CHARTE«13 Simple Swanm Systems Switching Strategies Switching between Regimes Switching within the Same Regime imechanics of Switching and Transaction Costs Strategy Neighborhoods Choice of a Simple Individual from a Population Additive Swarm System Example of an Additive Swarm Maximizing Swarm System Example of a Maximizing Swarm Global Performance Feedback Control 216 CHARTER 14 Implementing Swarm Systems Setting Up the Swarm Strategy Set Running the Swarm 220 CHARTER 15 Swarm Systems with Learning Reinforcement Learning Swarm Efficiency Behavior Exploitation by the Swarm Exploring New Behaviors Lamark among the Machines 227 PART THREE Optimizing Execution CHARTER 16 Analysis of Trading Costs No Free Lunch Slippage Intraday Seasonality of Liquidity Models of Market Impact Reaction to Aggression Limits to Openness 235

7 X CONTENTS CHARTER 17 Estimating Algorithmic Exemtion Tools Basic Algorithmic Execution Tools Estimation of Algorithmic Execution Methodologies A Simulation Engine for Algos Using Execution Algo Results in Model Estimation Joint Testing of Models and Algos 242 PARTFOUR Practica! Implementation CHARTER 18 Overview of a Scalable Architecture ECNs and Translation Aggregation and Disaggregation Order Management Controls Decisions Middle and Back Office Recovery 252 CHARTER 19 Principal Design Patterns Language-Agnostic Domain Model Solving Tasks in Adapted Languages Communicating between Components Messaging Bus Remote Procedure Calls Distributed Computing and Modularity Parallel Processing Garbage Collection and Memory Control 263 CHARTER 20 Data Persistence Business-Critical Data Object Persistence and Cached Memory Databases and Their Usage 269

8 Contents xi CHARTER 21 Fault Tolerance and Recovery Mechanisms Situations of Stress Communication Breakdown Externai Systems Breakdown Trades Busted at the ECN Level Give-Up Errors Causing Credit Line Problems Internal Systems Breakdown Planned Maintenance and Upgrades A Jam of Logs Is Better Than a Logjam of Errors Virtual Machine and Network Monitoring 278 CHARTER 22 Computational Efficiency CPU Spikes Recursive Computation of Model Signals and Performance Numeric Efficiency 285 CHARTER 23 Connectivity to Electronic Commerce Networks Adaptors The Translation Layer Orders: FIX Specific ECNs Price Sources: FAST Dealing with Latency Externai Constraints and Co-Location Avoid Being Short the Latency Option Synchronization under Constraints Improving Internal Latency 297 CHARTER 24 The Aggregation and Disaggregation Layer Quotes Filtering and Book Aggregation Filtering Quotes Synthetic Order Book Orders Aggregation and Fills Disaggregation Aggregating Positions and Orders Fills Disaggregation Book Transfers and Middle Office 303

9 xii CONTENTS CHARTER 25 The OMS Layer Order Management as a Recursive Controller Management of Positions Management of Resting Orders Algorithmic Orders Control under Stress Designing a Flexible OMS 310 CHARTER 26 The Human Control Layer Dashboard and Smart Scheduler Parameter Control Scheduled Flattening of Exposure Manual Orders Aggregator Representing a Trader by an Agent Writing a Trading Screen Monitoring Aggregated Streams 314' 26.3 Position and P & L Monitor Real-Time Exposure Monitor Displaying Equity Curves Online Trade Statistics and Fitnesses Trades Visualization Module 317 CHARTER 27 The Risk Management Layer Risky Business Automated Risk Management Manual Risk Control and the Panic Button 320 CHARTER 28 The Core Engine Layer Architecture Simulation and Recovery 325 CHARTER 29 Some Practica! Implementation Aspects Architecture for Build and Patch Releases Testing of Code before a Release Versioning of Code and Builds Persistence of State during Version Releases 328

10 Contents xiii 29.2 Hardware Considerations Bottleneck Analysis The Edge of Technology 330 Appendix Auxiiiary USP Functions 333 Bibliograph? 341 Index 351