Most recent routs in the U.S. financial markets have prompted an outpouring of angst. Detractors of high-frequency trading (HFT) were particularly up in arms about the market downturn, which many of them blamed squarely on manipulation by HFT. Much of the debate about the role of HFT in the events of August 2015 crash as well as previous market crashes was largely based on speculation. This article introduces data-driven evidence about the sequence of events on August 24, 2015, a particularly bad Monday when the U.S. equity markets lost over 4% in a single day. To understand the trading dynamics that led to a precipitousRead More →

U.S. regulators have recently questioned the role that high-frequency trading (HFT) plays in the bond market. The latest research from AbleMarkets studies a subclass of HFTs known as aggressive HFT. The research shows that: 1) Aggressive HFTs initiate, on average, 20% of trades in the U.S. Treasuries market. 2) Aggressive HFTs often trade U.S. Treasuries when no one else does: aggressive HFTs accounted for nearly all of the trades on the post-Thanksgiving Monday in 2014 and the post-Memorial Day Tuesday in 2015. 3) Participation of aggressive HFTs in the U.S. Treasury market has declined slightly in 2015 from 30% in much of December 2014 andRead More →

A New York Times article covering the latest Triple Crown horse race winner, American Pharaoh, noted that the horse was identified as having an amazing potential when the animal was only 1 year old. The prediction of success was made by a team of data scientists who estimated the horse’s performance by noting the size of the winner’s heart and other characteristics and comparing them with those of past race winners. On the future potential of the horse, the data scientists advised him, “to sell the house, but keep the horse.” Their prediction paid off – American Pharaoh won. The real victory, however, can beRead More →

You feel it, you know it: some stocks tend to have more intraday volatility than other stocks. Some stocks are specifically more prone to Flash Crashes than others. Some stocks have higher aggressive high-frequency trading (HFT) participation than other stocks. At this point in financial innovation, no savvy portfolio manager can afford to ignore intraday risk, and, instead, needs to make it an integral part of his portfolio selection model. Why do intraday dynamics need to enter portfolio selection models? Can’t portfolio managers simply ride out the intraday ups and downs in their pursuit of longer-term goals? The answer, yes, but at a considerable cost.Read More →

By Irene Aldridge Just over two weeks ago, NASDAQ stopped trading midday, fueling a new wave of speculation about the reliability and, ultimately, appropriateness of using computer technology in trading. Critics of trading algorithms readily jumped on the news bandwagon, happily denouncing technology as a source of all economic ills. In reality, however, on Aug. 22, 2013, NASDAQ halted its servers to comply with instructions from the U.S Securities and Exchange Commission (SEC). Had NASDAQ continued trading as usual that day, it would undoubtedly face hefty fines on the order of $10 to $15 million, like the penalty assessed to the New York Stock ExchangeRead More →

By Irene Aldridge Many high-profile long-term investors have publicly expressed their frustration with the tactics of some high frequency traders (HFTs). While much of the criticism leveled against high-frequency traders does not hold water (research has shown that HFTs drive down transaction costs incurred by all investors, for example), certain tactics should give investors pause. This article gives a brief overview of the HFT activity that pundits describe as troublesome and the actions investors can take to immunize their trading. I am scheduled to offer a detailed examination of these HFT activities, means to prevent it and approaches to minimize their impact in my newRead More →

By Irene Aldridge High frequency trading has been taking Wall Street by storm.  While no institution thoroughly tracks performance of high-frequency funds as of the date this article is written, colloquial evidence suggests that the majority of high-frequency managers delivered positive returns through the most recent financial crises. The discourse on what is the profitability of high-frequency trading strategies always runs into the question of availability of performance data on returns realized at different frequencies.  Hard data on performance of high-frequency strategies is indeed hard to find.  Hedge funds successfully running high-frequency strategies tend to shun the public limelight.  Others produce data from questionable sources.Read More →