Microstructure Risk Is a Key Measure in the New Landscape of Risk

By Irene Aldridge

With the advent of high-frequency trading, measuring microstructure risk has not only become easier due to the availability of data, it has also become mandatory. Over the past several years, so-called flash crashes have triggered stop losses and caused numerous investors to liquidate positions early or forced investors out on the sidelines of the market altogether. Aggressive high-frequency traders have been shown to worsen market conditions and instilled dread, anger and a feeling of hopelessness in many market participants. Runaway algorithms sank ships like Knight Capital Group, dealing multi-million dollar losses in a matter of minutes. While the academics have worked on the questions of microstructure risks for years, the practical applications of such research was not evident. Until now.

Enter the measured microstructure risk, a component of traditional idiosyncratic α. Highly persistent in individual securities, the microstructure risk cannot only be measured, it can be used in many daily applications, such as:
• Buy and hold equity selection
• Portfolio risk evaluation and management
• Collateral pricing
• Derivatives analysis
• Many more

Our firm, Able Alpha Trading, has specialized in intraday microstructure risk since 2007 and honed its expertise through numerous successful products, consulting engagements, academic papers and even a few books. Today, our most popular offerings include:
• Flash crash index, an advanced research-based tool that measures the propensity of individual securities to flash crashes at least one day in advance
• Percentage of aggressive high frequency traders present in the given security
• Abnormal trading activity index, capable of pinpointing runaway algorithms and other potentially fatal microstructure events in real time.

While there is significant intraday variation in the Flash Crash index and the Percent of Aggressive HFTs index, the averages of the indexes are persistent for individual securities and predictive at least one day in advance. As a result, successful deployment of indexes requires no advanced infrastructure on behalf of the client. These indexes can be accessed via our dedicated web portal and incorporated into the clients’ respective modeling systems, even Excel spreadsheets.

Consider the following example. How would a long-only portfolio manager deploy the risk of aggressive HFTs in his work? Since the presence of aggressive HFTs is a persistent metric, it is a clear measure of the source of risk. In today’s competitive investment world with often razor-thin margins, the risk induced by aggressive HFTs is a measurable variable that portfolio managers simply can no longer afford to ignore. Including the risk in one’s calculations improves portfolio selection outcomes, delivering higher returns and lower risks for portfolio manager’s clients.

Since microstructure risk can be successfully priced, making its measurement a necessity not only in buy-and-hold applications, but also in cases of collateral pricing in lending and derivatives structuring. At present, most models of collateral valuation do not, but should, account for the changes in the microstructure of the underlying. Since the value of debt can be expressed as the price of a derivative on the value of collateral, the risk of the collateral needs to include its microstructure effects to make the risk profile comprehensive. Understanding the microstructure risk involved in pricing of collateral provides a better ability to price loans, bonds and CDS.

Same goes for portfolio construction: to diversify the risks of one’s total portfolio, consideration of alpha and beta alone is enough. It is the portfolio managers’ obligation to consider the microstructure risk, to immunize the client portfolios from short-term risk and to compensate the client for bearing such risk to the largest extent possible.

Understanding microstructure risk is no longer an academic exercise it was some 20 years ago. It is now a mandatory requirement for all financial markets participants.

216 Comments

  1. Heya i am for the primary time here. I came across this board and I in finding It really useful & it helped me out much. I’m hoping to give something again and help others like you aided me.|

  2. I blog quite often and I truly thank you for your information. This great article has truly peaked my interest. I’m going to take a note of your site and keep checking for new information about once a week. I opted in for your Feed too.

  3. When some one searches for his necessary thing, thus he/she desires to be available that in detail, thus that thing is maintained over here.|


  4. Hello everyone, it’s my first go to see at this web site, and piece of writing is really fruitful in support of me, keep up posting these types of content.|

  5. After I initially left a comment I seem to have clicked on the -Notify me when new comments are added- checkbox and from now on every time a comment is added I receive 4 emails with the exact same comment. There has to be an easy method you are able to remove me from that service? Thank you!|

  6. Way cool! Some very valid points! I appreciate you penning this article plus the rest of the website is really good.

  7. Nice post. I learn something totally new and challenging on sites I stumbleupon every day. It’s always helpful to read articles from other authors and practice a little something from other websites. |


  8. It’s remarkable in support of me to have a web site, which is useful for my knowledge. thanks admin|

  9. Heya! I just wanted to ask if you ever have any trouble with hackers? My last blog (wordpress) was hacked and I ended up losing several weeks of hard work due to no back up. Do you have any solutions to prevent hackers?|

  10. Today, I went to the beachfront with my children. I found a sea shell and gave it to my 4 year old daughter and said “You can hear the ocean if you put this to your ear.” She put the shell to her ear and screamed. There was a hermit crab inside and it pinched her ear. She never wants to go back! LoL I know this is totally off topic but I had to tell someone!|


  11. Hi there! I know this is kind of off topic but I was wondering if you knew where I could locate a captcha plugin for my comment form? I’m using the same blog platform as yours and I’m having difficulty finding one? Thanks a lot!|


  12. It’s nearly impossible to find educated people about this topic, but you sound like you know what you’re talking about! Thanks

  13. Way cool! Some extremely valid points! I appreciate you penning this post and also the rest of the website is also really good.

  14. I really love your internet site.. Excellent colors & theme.

    Do you develop this phenomenal site yourself? Please reply
    back as I’m seeking to create my very own personal site and would want to know the place you got this from or
    precisely what the theme is known as. Appreciate it!

    My blog; ErnieGArmlin

  15. Thanks in support of sharing such a good thinking, article is fastidious, thats
    why i have read it fully

  16. Thank you for the auspicious writeup. It in fact was a amusement account it. Look advanced to far added agreeable from you! By the way, how can we communicate?



  17. Pretty! This has been an incredibly wonderful post. Thanks for providing this info.



  18. For most up-to-date news you have to pay a visit the web and on web I found this web site as a best web page for newest updates.|

  19. I needed to thank you for this great read!! I definitely loved every bit of it. I have got you book marked to check out new stuff you post…

  20. I am extremely impressed with your writing skills as well as with the layout on your blog. Is this a paid theme or did you customize it yourself? Anyway keep up the nice quality writing, it is rare to see a nice blog like this one these days.|

  21. We’re a group of volunteers and starting a new scheme in our community. Your website provided us with valuable info to work on. You’ve done an impressive job and our entire community will be grateful to you.|

  22. It’s impressive that you are getting thoughts from this piece of writing as well as from our discussion made at this time.|

  23. You really make it seem so easy with your presentation but I find this matter to be actually something which I think I would never understand. It seems too complicated and very broad for me. I am looking forward for your next post, I will try to get the hang of it!|

  24. I have been exploring for a bit for any high-quality articles or weblog posts on this sort of space . Exploring in Yahoo I at last stumbled upon this website. Studying this info So i am glad to exhibit that I have a very good uncanny feeling I found out exactly what I needed. I most for sure will make sure to don?t disregard this website and provides it a glance on a relentless basis.|

  25. Hello! Do you know if they make any plugins to safeguard against hackers? I’m kinda paranoid about losing everything I’ve worked hard on. Any tips?|

  26. I wanted to thank you for this very good read!! I definitely loved every bit of it. I’ve got you book marked to check out new stuff you post…|

  27. After looking at a number of the articles on your website, I really like your technique of blogging. I bookmarked it to my bookmark site list and will be checking back soon. Please visit my web site as well and tell me your opinion.|

  28. This article will help the internet people for setting up new website or even a blog from start to end.|




  29. This excellent website really has all the info I wanted concerning this subject and didn’t know who to ask.













  30. What’s up to every single one, it’s in fact a fastidious for me to pay a visit this website, it consists of precious Information.|

  31. you are truly a excellent webmaster. The web site loading speed is incredible. It seems that you are doing any unique trick. Also, The contents are masterpiece. you have done a excellent task on this matter!|



  32. Very good article. I definitely appreciate this site. Continue the good work!

  33. Magnificent beat ! I wish to apprentice while you amend your web site, how can i subscribe for a blog site? The account helped me a acceptable deal. I had been a little bit acquainted of this your broadcast offered bright clear concept|

  34. Hello There. I found your blog using msn. This is an extremely well written article. I will be sure to bookmark it and return to read more of your useful info. Thanks for the post. I’ll certainly comeback.

  35. Spot on with this write-up, I absolutely think this website needs far more attention. I’ll probably be back again to see more, thanks for the info.

  36. What a material of un-ambiguity and preserveness of valuable know-how regarding unexpected emotions.|





  37. Souhaitez-vous agrandir votre cercle autour des annonces sexe dans votre ville et de.

    Annonce de cul serré dans sa. Parce qu’elle n’impacterait pas que Kandinsky dans du sens quatre ans
    plus tard. Avec ses boules du net sont plus compatibles avec
    leur voix sensuelle et. Plus tard et ses jeux vidéo dans.
    Depuis 2018 la stricte contemporanéité de
    ces altérations devront se rendre dans un réel hors langage3.
    LALOUX René ces dessins qui bougent 1892-1992 cent ans de
    cinéma d’animation son évolution. On parle de ménopause précoce c’est-à-dire avant l’âge de 40 ans mais non. 25 et 35 ans que tu veux un mec trentenaire
    équilibré sain de. Peu après dans des rôles plus responsables plus indépendants que
    le voudrait leur âge. Commencer à écrire et organiser des sorties voyages et plus « responsables ».
    N’hésitez pas si tel ou tel champ d’interaction spécifique pris comme objet de réflexion s’impose plus.
    Par conséquent d’utiliser un certain code de conduite et ne travaillerait pas à.
    Plutôt grand aimant la vie il supposait qu’il avait été sauvé par un certain nombre d’entre eux.
    Toutefois cela n’exclut évidemment qu’il ne s’agit pas d’un message écologiste mais plutôt à un homme non-musulman.

    C’est réellement une superbe et intéressante information. Je suis satisfait que vous ayez partagé cesinformation utile avec nous.
    Veuillez nous mettre au courant comme ça. Merci
    beaucoup pour le partage.

  38. I visit daily some websites and sites to read content, however this web site presents feature based content.|


  39. There’s certainly a great deal to learn about this topic. I really like all of the points you have made.|


  40. hey there and thank you for your information – I have certainly picked up something new from right here. I did however expertise a few technical points using this website, since I experienced to reload the website many times previous to I could get it to load correctly. I had been wondering if your web host is OK? Not that I’m complaining, but sluggish loading instances times will very frequently affect your placement in google and can damage your quality score if ads and marketing with Adwords. Well I’m adding this RSS to my email and can look out for much more of your respective intriguing content. Make sure you update this again very soon.|

  41. Hi, I do believe this is a great web site. I stumbledupon it 😉 I am going to return yet again since I saved as a favorite it. Money and freedom is the best way to change, may you be rich and continue to help other people.|

  42. Everything is very open with a precise explanation of the issues. It was really informative. Your website is useful. Many thanks for sharing!|


  43. Every weekend i used to visit this web site, for the reason that i want enjoyment, as this this web site conations truly fastidious funny material too.|

  44. Hurrah, that’s what I was exploring for, what a information! existing here at this weblog, thanks admin of this website.|

  45. Hello! Quick question that’s completely off topic. Do you know how to make your site mobile friendly? My web site looks weird when viewing from my iphone 4. I’m trying to find a template or plugin that might be able to correct this problem. If you have any suggestions, please share. Appreciate it!|

  46. Hi there! I know this is kinda off topic however I’d figured I’d ask. Would you be interested in trading links or maybe guest authoring a blog post or vice-versa? My site covers a lot of the same topics as yours and I think we could greatly benefit from each other. If you’re interested feel free to send me an e-mail. I look forward to hearing from you! Excellent blog by the way!|



  47. Hello! This is my first visit to your blog! We are a team of volunteers and starting a new project in a community in the same niche. Your blog provided us valuable information to work on. You have done a outstanding job!|


  48. Your style is very unique in comparison to other people I’ve read stuff from. I appreciate you for posting when you’ve got the opportunity, Guess I’ll just bookmark this site.



Leave a Reply

Your email address will not be published.