HIGH-FREQUENCY TRADING SECOND EDITION A Practical Guide to Algorithmic Strategies and Trading Systems Irene Aldridge WILEY
Preface Acknowledgments XI xiii CHAPTER 1 How Modern Markets Differ from Those Past. 1 Media, Modern Markets, and HFT 6 HFT as Evolution of Trading Methodology ' 7 What Is High-Frequency Trading? 13 What Do High-Frequency Traders Do? 15 How Many High-Frequency Traders Are There? 17 Major Players in the HFT Space 17 Organization of This Book 18. 18 19 CHAPTER 2 Technological Innovations, Systems, and HFT 21 A Brief History of Hardware 21 Messaging 25 Software. ' 3 3.. 35 35 CHAPTER 3 Market Microstructure, Orders, and Limit Order Books 37, Types of Markets 37 1 Limit Order Books x 39 Aggressive versus Passive Execution 43 Complex Orders 44 Trading Hours 45 Modern Microstructure: Market Convergence and Divergence 46
Fragmentation in Equities 46 Fragmentation in Futures 50 Fragmentation in Options 51 Fragmentation in Forex 51 Fragmentation in Fixed Income 51 Fragmentation in Swaps 51 52 52 CHAPTER 4 High-Frequency Data S3 What Is High-Frequency Data? 53 How Is High-Frequency Data Recorded? 54 Properties of High-Frequency Data 56 High- Frequency Data Are Voluminous 57 High-Frequency Data Are Subject to the Bid-Ask Bounce 59 High-Frequency Data Are Not Normal or Lognormal 62 High-Frequency Data Are Irregularly Spaced in Time 62 Most High-Frequency Data Do Not Contain Buy-and-Sell Identifiers 70 ", 73 74 Ill CHAPTER 5 Trading Costs 75 Overview of Execution Costs 75 Transparent Execution Costs, 76 Implicit Execution Costs 78 Background and Definitions 82 Estimation of Market Impact 85 Empirical Estimation of Permanent Market Impact 88 96 96 CHAPTER 6 Performance and Capacity of High-Frequency Trading Strategies 97 Principles of Performance Measurement 97 Basic Performance Measures 98 Comparative Ratios 106 Performance Attribution 110 Capacity Evaluation 112 Alpha Decay 116 116 ~- 116 CHAPTER 7 The Business of High-Frequency Trading 117 Key Processes of HFT 117
Financial Markets Suitable for HFT Economics of HFT Market Participants CHAPTER 8 Statistical Arbitrage Strategies Practical Applications of Statistical Arbitrage End- of- Chapter Questions CHAPTER 9 Directional Trading Around Events Developing Directional Event-Based Strategies What Constitutes an Event? Forecasting Methodologies Tradable News Application of Event Arbitrage CHAPTER 10 Automated Market Making Naive Inventory Models Introduction Market Making: Key Principles Simulating a Market-Making Strategy Naive Market-Making Strategies Market Making as a Service Profitable Market Making CHAPTER 11 Automated Market Making II What's in the Data? Modeling Information in Order Flow CHAPTER 12 Additional HFT Strategies, Market Manipulation, and Market Crashes Latency Arbitrage Spread Scalping Rebate Capture Quote Matching Layering Ignition 121 122 129 130 130 131 133 144 144 147 148 149 150 153 155 163 163 165 165 167 167 168 173 176 178 178 179 179 182 193 193-195 196 197 198 199 200 t ix n 0 z z
CHAPTER 13 Regulation Pinging/ Sniping/ Sniffing/ Phishing Quote Stuffing Spoofing Pump-and-Dump Machine Learning Key Initiatives of Regulators Worldwide CHAPTER 14 Risk Management of HFT Measuring HFT Risk CHAPTER 15 Minimizing Market Impact Why Execution Algorithms? Order-Routing Algorithms Issues with Basic Models Advanced Models Practical Implementation of Optimal Execution Strategies CHAPTER 16 Implementation of HFT Systems Model Development Life Cycle System Implementation Testing Trading Systems 202 202 207 208 208 209 209 222 223 225 225 244 244 245 245 247 258 262 269 269 270 271 271 273 283 286 287 About the Author About the Web Site References Index 288 290 291 303