{"id":7564,"date":"2012-06-20T09:37:52","date_gmt":"2012-06-20T08:37:52","guid":{"rendered":"https:\/\/www.portfolioprobe.com\/?p=7564"},"modified":"2012-07-16T16:44:09","modified_gmt":"2012-07-16T15:44:09","slug":"high-frequency-trading-and-the-volume-clock","status":"publish","type":"post","link":"https:\/\/www.portfolioprobe.com\/2012\/06\/20\/high-frequency-trading-and-the-volume-clock\/","title":{"rendered":"High frequency trading and the volume clock"},"content":{"rendered":"

A pictorial summary of “The Volume Clock: Insights into the High Frequency Paradigm”<\/a> by David Easley, Marcos M. Lopez de Prado and Maureen O’Hara.<\/p>\n

“HFT” means “high-frequency trading\/trader”, “LFT” means “low-frequency trading\/trader”.<\/p>\n

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Legend holds that Nathan Mayer Rothschild used racing pigeons to front run his competitors and trade on the news of Napoleon\u2019s defeat at Waterloo a full day ahead of His Majesty\u2019s official messengers<\/p>\n

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high-frequency traders have been characterized as \u2018cheetah traders\u2019, an uncomplimentary allusion to their speed and character. The reality is, as usual, more complex.<\/p>\n

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It would be a mistake, for example, to conflate the HFT strategies of cash equities and the HFT strategies of futures on equity indices. The reason is that HFT is not particularly related to macro factors (such as asset class), but it is intimately related to market microstructural factors.<\/p>\n

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Thinking in volume-time (or any other index of activity) is challenging for us humans. But for a \u2018silicon trader\u2019, it is the natural way to process information and engage in sequential, strategic trading.<\/p>\n

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A HFT market maker has little use for a model that attempts to forecast volatility over a chronological time horizon, because she must keep her inventory under control in volume time<\/p>\n

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A chess player makes moves at different speeds during a game, depending on several factors: Superiority over the adversary, stage of the game, amount of material lost, computational power, experience with the existing position, time remaining before the end of the game, etc. It would make little sense for a chess player to attempt making moves every minute<\/p>\n

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Predatory algorithms constitute a very distinct species of informed traders, because of the nature of their information and the frequency of their actions.<\/p>\n

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Pack hunters: Predators hunting independently become aware of each other\u2019s activities, and form a pack in order to maximize the chances of triggering a cascading effect<\/p>\n

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Because of the threat posed by predators, high frequency liquidity providers must be much more tactical … Sometimes they may suddenly pull all orders, liquidate their positions and stop providing liquidity altogether. This decision has more to do with computer science and game theory than it does with valuation fundamentals.<\/p>\n

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GUI (Graphical User Interface) traders have buttons for sizes with round numbers. HFT algorithms know that if many participants are operating with round numbers in a given moment of the trading session, the market is likely to behave in a particular way.<\/p>\n

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What does appear clear is that HFT cannot be un-invented, or regulated away, without some severe market effects.<\/p>\n

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The new paradigm that underlies HFT is not really about speed, so regulatory efforts to slow \u201ccheetah traders\u201d miss the larger point that what is undesirable are particular manipulative strategies and not HFT per se.<\/p>\n

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This is just one example of how vulnerable the \u201cchronological time\u201d paradigm has made LFTs<\/p>\n

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Join the herd<\/strong>. Trade with volume bursts, like at the opening and closing of the session, when your footprint is harder to be detected.<\/p>\n

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Whenever a new predator makes its appearance in a habitat, there is a shock period until the hunted species adapt and evolve.<\/p>\n

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Rather than seeking \u201cendangered species\u201d status for LFTs (by virtue of legislative action like a Tobin tax or speed limit), it seems more efficient and less intrusive to starve some HFTs by making LFTs smarter.<\/p><\/blockquote>\n

Read the whole of “The Volume Clock: Insights into the High Frequency Paradigm”<\/a>.<\/p>\n

Hat tip to Marginal Revolution<\/strong><\/a>.<\/p>\n

image credits<\/h4>\n

Racing pigeon by maart02 via stock.xchng<\/p>\n

Cheetahs from istockphoto.com<\/p>\n

“Microstructure” by forwardcom via stock.xchng<\/p>\n

Donnely’s Weir by Bjay70 via stock.xchng<\/p>\n

Chess by sha7t00t via stock.xchng<\/p>\n

Crocodile by tome213 via stock.xchng<\/p>\n

Wolves by AinaM via stock.xchng<\/p>\n

Faucet by tiano69 via stock.xchng<\/p>\n

Gears by svilen001 via stock.xchng<\/p>\n

Bloody hand by cahdequech via stock.xchng<\/p>\n

Dali clock by kiamedia via stock.xchng<\/p>\n

Herd by johnnyberg via stock.xchng<\/p>\n

Lions by stellab via stock.xchng<\/p>\n

Pandas by thadz via stock.xchng<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

A pictorial summary of “The Volume Clock: Insights into the High Frequency Paradigm” by David Easley, Marcos M. Lopez de Prado and Maureen O’Hara. “HFT” means “high-frequency trading\/trader”, “LFT” means “low-frequency trading\/trader”. Legend holds that Nathan Mayer Rothschild used racing pigeons to front run his competitors and trade on the news of Napoleon\u2019s defeat at … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[254,253],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/posts\/7564"}],"collection":[{"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/comments?post=7564"}],"version-history":[{"count":0,"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/posts\/7564\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/media?parent=7564"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/categories?post=7564"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.portfolioprobe.com\/wp-json\/wp\/v2\/tags?post=7564"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}