High–Frequency Trading + Website, Second Edition – A Practical Guide to Algorithmic Strategies and Trading Systems

<p>Preface xi</p>
<p>Acknowledgments xiii</p>
<p>Chapter 1 How Modern Markets Differ from Those Past 1</p>
<p>Media, Modern Markets, and HFT 6</p>
<p>HFT as Evolution of Trading Methodology 7</p>
<p>What Is High–Frequency Trading? 13</p>
<p>What Do High–Frequency Traders Do? 15</p>
<p>How Many High–Frequency Traders Are There? 17</p>
<p>Major Players in the HFT Space 17</p>
<p>Organization of This Book 18</p>
<p>Summary 18</p>
<p>End–of–Chapter Questions 19</p>
<p>Chapter 2 Technological Innovations, Systems, and HFT 21</p>
<p>A Brief History of Hardware 21</p>
<p>Messaging 25</p>
<p>Software 33</p>
<p>Summary 35</p>
<p>End–of–Chapter Questions 35</p>
<p>Chapter 3 Market Microstructure, Orders, and Limit Order Books 37</p>
<p>Types of Markets 37</p>
<p>Limit Order Books 39</p>
<p>Aggressive versus Passive Execution 43</p>
<p>Complex Orders 44</p>
<p>Trading Hours 45</p>
<p>Modern Microstructure: Market Convergence and Divergence 46</p>
<p>Fragmentation in Equities 46</p>
<p>Fragmentation in Futures 50</p>
<p>Fragmentation in Options 51</p>
<p>Fragmentation in Forex 51</p>
<p>Fragmentation in Fixed Income 51</p>
<p>Fragmentation in Swaps 51</p>
<p>Summary 52</p>
<p>End–of–Chapter Questions 52</p>
<p>Chapter 4 High–Frequency Data 53</p>
<p>What Is High–Frequency Data? 53</p>
<p>How Is High–Frequency Data Recorded? 54</p>
<p>Properties of High–Frequency Data 56</p>
<p>High–Frequency Data Are Voluminous 57</p>
<p>High–Frequency Data Are Subject to the Bid–Ask Bounce 59</p>
<p>High–Frequency Data Are Not Normal or Lognormal 62</p>
<p>High–Frequency Data Are Irregularly Spaced in Time 62</p>
<p>Most High–Frequency Data Do Not Contain Buy–and–Sell Identifiers 70</p>
<p>Summary 73</p>
<p>End–of–Chapter Questions 74</p>
<p>Chapter 5 Trading Costs 75</p>
<p>Overview of Execution Costs 75</p>
<p>Transparent Execution Costs 76</p>
<p>Implicit Execution Costs 78</p>
<p>Background and Definitions 82</p>
<p>Estimation of Market Impact 85</p>
<p>Empirical Estimation of Permanent Market Impact 88</p>
<p>Summary 96</p>
<p>End–of–Chapter Questions 96</p>
<p>Chapter 6 Performance and Capacity of High–Frequency Trading Strategies 97</p>
<p>Principles of Performance Measurement 97</p>
<p>Basic Performance Measures 98</p>
<p>Comparative Ratios 106</p>
<p>Performance Attribution 110</p>
<p>Capacity Evaluation 112</p>
<p>Alpha Decay 116</p>
<p>Summary 116</p>
<p>End–of–Chapter Questions 116</p>
<p>Chapter 7 The Business of High–Frequency Trading 117</p>
<p>Key Processes of HFT 117</p>
<p>Financial Markets Suitable for HFT 121</p>
<p>Economics of HFT 122</p>
<p>Market Participants 129</p>
<p>Summary 130</p>
<p>End–of–Chapter Questions 130</p>
<p>Chapter 8 Statistical Arbitrage Strategies 131</p>
<p>Practical Applications of Statistical Arbitrage 133</p>
<p>Summary 144</p>
<p>End–of–Chapter Questions 144</p>
<p>Chapter 9 Directional Trading Around Events 147</p>
<p>Developing Directional Event–Based Strategies 148</p>
<p>What Constitutes an Event? 149</p>
<p>Forecasting Methodologies 150</p>
<p>Tradable News 153</p>
<p>Application of Event Arbitrage 155</p>
<p>Summary 163</p>
<p>End–of–Chapter Questions 163</p>
<p>Chapter 10 Automated Market Making Na&iuml;ve Inventory Models 165</p>
<p>Introduction 165</p>
<p>Market Making: Key Principles 167</p>
<p>Simulating a Market–Making Strategy 167</p>
<p>Na&iuml;ve Market–Making Strategies 168</p>
<p>Market Making as a Service 173</p>
<p>Profitable Market Making 176</p>
<p>Summary 178</p>
<p>End–of–Chapter Questions 178</p>
<p>Chapter 11 Automated Market Making II 179</p>
<p>What s in the Data? 179</p>
<p>Modeling Information in Order Flow 182</p>
<p>Summary 193</p>
<p>End–of–Chapter Questions 193</p>
<p>Chapter 12 Additional HFT Strategies, Market Manipulation, and Market Crashes 195</p>
<p>Latency Arbitrage 196</p>
<p>Spread Scalping 197</p>
<p>Rebate Capture 198</p>
<p>Quote Matching 199</p>
<p>Layering 200</p>
<p>Ignition 201</p>
<p>Pinging/Sniping/Sniffing/Phishing 201</p>
<p>Quote Stuffing 201</p>
<p>Spoofing 202</p>
<p>Pump–and–Dump 202</p>
<p>Machine Learning 207</p>
<p>Summary 208</p>
<p>End–of–Chapter Questions 208</p>
<p>Chapter 13 Regulation 209</p>
<p>Key Initiatives of Regulators Worldwide 209</p>
<p>Summary 222</p>
<p>End–of–Chapter Questions 223</p>
<p>Chapter 14 Risk Management of HFT225</p>
<p>Measuring HFT Risk 225</p>
<p>Summary 244</p>
<p>End–of–Chapter Questions 244</p>
<p>Chapter 15 Minimizing Market Impact 245</p>
<p>Why Execution Algorithms? 245</p>
<p>Order–Routing Algorithms 247</p>
<p>Issues with Basic Models 258</p>
<p>Advanced Models 262</p>
<p>Practical Implementation of Optimal Execution Strategies 269</p>
<p>Summary 269</p>
<p>End–of–Chapter Questions 270</p>
<p>Chapter 16 Implementation of HFT Systems 271</p>
<p>Model Development Life Cycle 271</p>
<p>System Implementation 273</p>
<p>Testing Trading Systems 283</p>
<p>Summary 286</p>
<p>End–of–Chapter Questions 287</p>
<p>About the Author 288</p>
<p>About the Web Site 290</p>
<p>References 291</p>
<p>Index 303</p>