High-Frequency Trading New Realities for Traders, Markets and Regulators
EDITED BY DAVID EASLEY, MARCOS LÓPEZ DE PRADO, AND MAUREEN O’HARA
High-Frequency Trading Trading
High-Frequency Trading Trading
High-Frequency High-Frequency Trading Trading New Realities Realities for Traders, raders, Markets and Regulators Regulators
Edited by David Easley, Marcos López de Prado and Maureen O’Hara
Published by Risk Books, a Division of Incisive Media Investments Ltd Incisive Media 32–34 Broadwick Street London London W1A 2HG Tel: +44(0) 20 7316 9000 E-mail:
[email protected] [email protected] Sites: www.riskbooks.com www.riskbooks.com www.incisivemedia.com © 2013 Incisive Media Investments Limited ISBN 978-1-78272-009-6 British Library Cataloguing in Publication Data A catalogue record for this book is available from from the British Library
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Contents
About the Editors
vii
About the Authors
ix
Preface
xv
1
The Volume Clock: Insights into the High-Frequency Paradigm David Easley; Marcos López de Prado; Maureen O’Hara Cornell University; RCC at Harvard University; Cornell University
2
Execution Strategies in Equity Markets Michael G. Sotiropoulos Bank of America Merrill Lynch
21
3
Execution Strategies in Fixed Income Markets Robert Almgren Quantitative Brokers LLC; New York University Courant Institute of Mathematical Sciences
43
4
High-Frequency Trading in FX Markets Anton Golub, Alexandre Dupuis, Richard B. Olsen Olsen Ltd
65
5
Machine Learning for Market Microstructure and High-Frequency Trading Michael Kearns and Yuriy Nevmyvaka University of Pennsylvania
6
A “Big Data” Study of Microstructural Volatility in Futures Markets Kesheng Wu, E. Wes Bethel, Ming Gu, David Leinweber, Oliver Rübel Lawrence Berkeley National Laboratory
1
91
125
7
Liquidity and Toxicity Contagion David Easley; Marcos López de Prado; Maureen O’Hara Cornell University; RCC at Harvard University; Cornell University
143
8
Do Algorithmic Executions Leak Information? George Sofianos, JuanJuan Xiang Goldman Sachs Equity Execution Strats
159
v
HIGH-FREQUENCY TRADING
9
Implementation Shortfall with Transitory Price Effects Terrence Hendershott; Charles M. Jones; Albert J. Menkveld University of California, Berkeley; Columbia Business School; VU University Amsterdam
185
10 The Regulatory Challenge of High-Frequency Markets Oliver Linton; Maureen O’Hara; J. P. Zigrand University of Cambridge; Cornell University; London School of Economics and Political Science
207
Index
vi
231
About the Editors David Easley is the Henry Scarborough professor of social science, professor of economics and professor of information science at Cornell University. He served as chair of the Cornell economics department from 1987 to 1993 and 2010 to 2012. He is a fellow of the Econometric Society and has served as an associate editor of numerous economics journals. David recently co-authored the book Networks, Crowds and Markets: Reasoning About a Highly Connected World, which combines scientific perspectives from economics, computing and information science, sociology and applied mathematics to describe the emerging field of network science. Marcos López de Prado is head of quantitative trading and research at HETCO, the trading arm of Hess Corporation, a Fortune 100 company. Previously, Marcos was head of global quantitative research at Tudor Investment Corporation, where he also led high-frequency futurestrading.Inadditiontomorethan15yearsofinvestmentmanagement experience, Marcos has received several academic appointments, including postdoctoral research fellow of RCC at Harvard University, visiting scholar at Cornell University, and research affiliate at Lawrence Berkeley National Laboratory (US Department of Energy’sOfficeofScience).Marcosholdstwodoctoratedegreesfrom Complutense University, is a recipient of the National Award for Excellence in Academic Performance (Government of Spain), and was admitted into American Mensa with a perfect test score. Maureen O’Hara is the Robert W. Purcell professor of finance at the Johnson Graduate School of Management, Cornell University. Her research focuses on market microstructure, and she is the author of numerous journal articles as well as the book Market Microstructure Theory. Maureen serves on several corporate boards, and is chairman of the board of ITG, a global agency brokerage firm. She is a mem ber of the CFTC-SEC Emerging Regulatory Issues Task Force (the “flash crash” committee), the Global Advisory Board of the Securities Exchange Board of India (SEBI) and the Advisory Board of the Office of Financial Research, US Treasury.
vii
About the Authors Robert Almgren is a co-founder of Quantitative Brokers, which providesagencyalgorithmicexecutionandcostmeasurementininterest rate markets. He is a Fellow in the mathematics in finance program at New York University. Until 2008, Robert was a managing director and head of quantitative strategies in the electronic trading services group of Banc of America Securities. From 2000 to 2005 he was a tenured associate professor of mathematics and computer science at the University of Toronto, and director of its Master of Mathematical Finance program. He has an extensive research record in applied mathematics, including papers on optimal trading, transaction cost measurement and portfolio construction. 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 for Computing Machinery. He has a PhD in computer science from the University of California, Davis. Alexandre Dupuis has worked at OLSEN since 2006 and is head of the quantitative research unit Romandy. His focus lies in researching and developing trading models as well as creating risk-management tools. Alex is a member of the risk-management team where he controls a third of the investment portfolio. In collaboration with universities, he supervises PhD students in the field of quantitative finance. Alex holds a PhD in computer science from the University of Geneva and has gained further research experience by working at the University of Oxford and at ETH. 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 microstructure and flash crashes. In 2012, he was invited to participate in an international project on computerised trading funded by the ix
