Understanding Short-term Dynamics of Order Execution to Minimize Adverse Selection

By:
On:
In: Big Data, HFT, Regulation, Risk
Tagged: , , , , ,
With: 4,752 Comments

When you trade, do you place market orders, limit orders or a combination of both? Do you or should you care? The answer is yes, you should care, particularly in today’s volatile markets, and this article explains why.

When investors place a market order, say, an order to buy 100 shares of IBM at market, the investors are trying to tell the exchanges: “buy 100 shares of IBM for my account at the best available price.” However, by the time the order is transmitted to their broker and then by their broker to the exchange, the best available price may have drifted away. The larger the intraday fluctuation of prices, known as volatility, the higher is the chance that the price has drifted away quite a bit, potentially erasing all intended profits from the trade. This drift of the price is known as slippage, and the risk of slippage presents a considerable problem with market orders. Particularly when the order is placed around major market movements, for example, those accompanying major economic news releases, the price obtained may be several dollars or percentage points higher than intended by the investor.

A sound alternative to market orders and the slippage that accompanies them is execution via limit orders. When directing the brokers and exchanges to trade via limit orders, say, buy 100 shares of IBM at $155.50 or a better price, if available, the investor’s order will only be executed at the specified $155.50 or better (in the case of limit buy orders, lower) price.

Of course, while the limit orders specify the price, they do not specify exactly when the order will be filled. It is, therefore, entirely possible that from the time the investor places his limit order until that order is executed, market conditions change dramatically, and the order will be executed just as the markets are moving in the wrong direction. For an investor placing a limit buy order, this wrong direction would be a falling price.

This risk is particularly acute when the investor does not know all the news moving the markets at the moment he places his order. Such information asymmetry has its own name: adverse selection. Investors placing limit orders subject to adverse selection are literally taken by market orders placed by traders with better information. In the present age of Big Data, such better information may come from anywhere and at a lightning speed. One may spend millions of dollars just acquiring and aggregating various information sources, wiping out the investing profits.

AbleMarkets provides an alternative: tracking traders who already accumulated all the information. Indeed, AbleMarkets Aggressive HFT Index monitors activity of this well-informed class of market participants in any electronically-traded instrument. The activity is highly predictive of short-term market movements and helps investors considering limit orders to mitigate the risks of adverse selection by avoiding placing limit orders at the wrong time. Instead, the AbleMarkets Aggressive HFT Index pinpoints the right times to place limit orders: limit buy orders when the market for a particular financial instrument is about to rise, and limit sell order when the market is about to fall, saving investors millions on data and adverse selection losses in the process.

Steve Krawciw is CEO of AbleMarkets.com. Irene Aldridge is Managing Director of Able Alpha Trading, LTD., and AbleMarkets.com and author of High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems (2nd edition, Wiley, 2013).

Related Posts:

4,752 Comments

  1. I am sure this piece of writing has touched all the internet people, its really really fastidious piece of writing on building up new weblog.

  7. Whoa! This blog looks exactly like my old one!
    It’s on a totally different subject but it has pretty much the same layout and
    design. Wonderful choice of colors!

  15. Great information. Lucky me I came across your site by chance (stumbleupon). I have book marked it for later.


  23. Hello there, just became aware of your blog through Google, and found that it’s truly informative.
    I am going to watch out for brussels. I will be grateful if you continue this in future.
    A lot of people will be benefited from your writing.
    Cheers!

  35. Pretty section of content. I just stumbled upon your web site and in accession capital to assert that I acquire in fact
    enjoyed account your blog posts. Any way I will be subscribing to your augment and even I
    achievement you access consistently rapidly.

  57. Just want to say your article is as amazing. The clearness on your post is
    just cool and that i can suppose you are an expert on this subject.
    Well together with your permission allow me to grab your RSS feed to stay up to date
    with approaching post. Thank you a million and please continue
    the enjoyable work.

  59. An interesting discussion is definitely worth comment. I do believe that you ought to publish more on this subject, it might not be a taboo matter but usually folks don’t talk about such topics. To the next! Kind regards.

  60. Its like you learn my thoughts! You seem
    to grasp a lot about this, like you wrote the ebook in it or something.
    I feel that you simply could do with some percent to force the message house
    a bit, but other than that, this is great blog.
    A fantastic read. I will certainly be back.

  66. Hi! I could have sworn I’ve been to this blog before
    but after browsing through some of the post I realized it’s
    new to me. Anyhow, I’m definitely happy I found it and I’ll
    be book-marking and checking back frequently!

  73. This is my first time pay a visit at here and i am actually pleassant
    to read everthing at single place.

  86. Great blog here! Additionally your website quite a bit up
    fast! What web host are you the use of? Can I get your affiliate link for your host?
    I want my web site loaded up as fast as yours lol

  114. Nice post. I learn something more challenging on different blogs everyday. It will always be stimulating to read content from other writers and practice a little something from their store. I?d prefer to use some with the content on my blog whether you don?t mind. Natually I?ll give you a link on your web blog. Thanks for sharing.


  123. Wow, awesome blog structure! How long have you been running a
    blog for? you make running a blog look easy. The entire
    look of your web site is fantastic, let alone the content material!

  124. What’s Taking place i am new to this, I stumbled upon this I
    have discovered It absolutely helpful and it has helped me out loads.
    I’m hoping to contribute & help other users like its
    aided me. Good job.

  126. What’s up to every single one, it’s actually a good for me
    to pay a visit this website, it consists of useful Information.

  144. It’s actually a great and helpful piece of information. I’m satisfied that you simply shared this useful information with us.
    Please stay us up to date like this. Thanks for sharing.

  147. Hello, i think that i saw you visited my web site thus
    i came to “return the favor”.I’m trying to find things to enhance my web site!I suppose its
    ok to use some of your ideas!!

  159. I don’t even know how I ended up here, but I thought this
    post was good. I don’t know who you are but
    definitely you are going to a famous blogger if you aren’t already 😉 Cheers!

  166. Hey! I’m at work surfing around your blog from my new iphone!
    Just wanted to say I love reading your blog and look forward to all
    your posts! Keep up the fantastic work!

  167. Write more, thats all I have to say. Literally, it seems as though you relied on the video to make your point.
    You definitely know what youre talking about, why throw away
    your intelligence on just posting videos to your site when you could be giving us
    something enlightening to read?


  172. Great post. I was checking continuously this blog and I am impressed!
    Extremely useful information particularly the last part :
    ) I care for such information a lot. I was looking
    for this particular information for a very long time.
    Thank you and good luck.

  185. Asking questions are actually fastidious thing if you
    are not understanding something fully, except this piece of writing offers good
    understanding yet.

  193. I don’t even know how I stopped up here, however I believed this put
    up used to be good. I don’t understand who you are however definitely you’re going
    to a famous blogger in case you are not already.
    Cheers!

  206. You could definitely see your skills in the article you
    write. The world hopes for even more passionate writers such as
    you who aren’t afraid to mention how they believe.
    Always follow your heart.

  207. all the time i used to read smaller content that also clear their motive, and that
    is also happening with this article which I am reading at this place.

  212. After exploring a few of the blog posts on your blog, I truly
    like your way of blogging. I book-marked it to
    my bookmark webpage list and will be checking back soon. Please
    check out my web site as well and let me know how you feel.

  225. Hello there! This post could not be written any better!
    Reading this post reminds me of my previous room mate!
    He always kept chatting about this. I will forward this write-up
    to him. Pretty sure he will have a good read. Thank you for sharing!

  234. Wow, incredible blog structure! How lengthy have you been blogging for?
    you make blogging glance easy. The entire look of your web site
    is magnificent, let alone the content material!

  235. I know this if off topic but I’m looking into starting my own blog and was wondering what all is needed to get set up?
    I’m assuming having a blog like yours would cost a pretty penny?
    I’m not very web savvy so I’m not 100% positive.
    Any recommendations or advice would be greatly appreciated.

    Thanks

  238. Do you have a spam problem on this site; I
    also am a blogger, and I was curious about your situation; many of
    us have created some nice methods and we are looking to exchange
    methods with others, please shoot me an email if
    interested.

  249. You could certainly see your enthusiasm within the work you write.
    The world hopes for even more passionate writers such as you who are not afraid to
    say how they believe. Always go after your heart.

  251. Simply wanna tell that this is very beneficial , Thanks for taking your time to write this.

  255. Hi every one, here every person is sharing these know-how, therefore it’s fastidious to read this blog, and I used to
    pay a visit this blog everyday.

  263. Attractive section of content. I just stumbled upon your weblog and in accession capital to assert that I get actually enjoyed account your blog posts.
    Anyway I will be subscribing to your feeds and even I achievement you access consistently fast.

  265. I think this is among the most significant info for me. And i am glad reading your article. But want to remark on few general things, The site style is wonderful, the articles is really excellent : D. Good job, cheers

  291. I am also writing to let you know what a outstanding discovery my wife’s child found visiting yuor web blog. She even learned plenty of things, including what it’s like to possess an awesome teaching spirit to let many people smoothly understand a variety of impossible matters. You actually surpassed people’s desires. I appreciate you for delivering such necessary, safe, edifying and also cool guidance on the topic to Sandra.

  298. Hi, just wanted to mention, I liked this blog post.
    It was practical. Keep on posting!

  310. I think everything published was very reasonable. But, what about this?
    suppose you added a little content? I ain’t suggesting your information is
    not good, however what if you added a post title that makes people want more?

    I mean Understanding Short-term Dynamics of Order Execution to
    Minimize Adverse Selection – Irene Aldridge –
    The Official Site is kinda boring. You could peek at Yahoo’s front page and watch how they create article titles to grab viewers
    to click. You might add a video or a related picture or two to
    get readers interested about what you’ve written. In my opinion, it might make your website a
    little livelier.

  316. Nice post. I was checking continuously this blog and I am impressed!

    Very helpful info particularly the last part 🙂 I care
    for such info a lot. I was seeking this certain information for
    a very long time. Thank you and good luck.

  320. You made some good points there. I looked on the web for more info about the issue and found
    most individuals will go along with your views on this site.

  342. magnificent post, very informative. I wonder why the other experts of this sector don’t understand this.
    You should continue your writing. I am confident, you’ve a huge readers’ base already!

  351. Thank you for any other informative site. Where else may I am getting that kind of info written in such an ideal means?

    I’ve a challenge that I am simply now operating on, and I have
    been on the glance out for such info.

  364. It’s difficult to find educated people for this topic,
    however, you seem like you know what you’re talking about!
    Thanks

  379. Sweet blog! I found it while surfing around on Yahoo News.
    Do you have any tips on how to get listed in Yahoo News?
    I’ve been trying for a while but I never seem to get there!
    Thank you

  383. I have been absent for some time, but now I remember why I used to love this website. Thanks, I’ll try and check back more frequently. How frequently you update your web site?

  392. I regard something truly interesting about your site so I bookmarked .

  397. Awesome issues here. I am very satisfied to peer your post.
    Thanks a lot and I am having a look forward to touch you.
    Will you please drop me a mail?

  402. I’ve been browsing online more than 3 hours today, yet I never found any
    interesting article like yours. It’s pretty worth enough for me.
    In my opinion, if all web owners and bloggers made good content as you did, the internet
    will be much more useful than ever before.

  421. Amazing blog! Is your theme custom made or did you download it from somewhere?
    A theme like yours with a few simple adjustements would really
    make my blog stand out. Please let me know where you got your
    design. Cheers

  423. You have made some good points there. I looked on the net for additional information about the
    issue and found most people will go along with your views
    on this site.

  426. I’m gone to tell my little brother, that he should also go to see this website on regular basis to obtain updated from latest reports.

  483. Enjoyed reading this, very good stuff, thanks . “Whenever you want to marry someone, go have lunch with his ex-wife.” by Francis William Bourdillon.

  494. Remarkable issues here. I am very satisfied to see your article.
    Thank you so much and I’m taking a look ahead to contact you.
    Will you kindly drop me a e-mail?

  500. Hmm is anyone else experiencing problems with the pictures on this blog loading?
    I’m trying to determine if its a problem on my end or if it’s the blog.
    Any suggestions would be greatly appreciated.

  520. Hello mates, fastidious post and pleasant arguments commented at this place, I am in fact
    enjoying by these.

  525. I relish, result in I found exactly what I was looking for.
    You’ve ended my four day lengthy hunt! God Bless you man. Have a
    nice day. Bye

  527. First off I would like to say wonderful blog! I
    had a quick question which I’d like to ask if you don’t
    mind. I was interested to find out how you center yourself and
    clear your head before writing. I’ve had trouble clearing my mind in getting my thoughts out there.
    I truly do enjoy writing but it just seems like the first 10 to 15 minutes are generally lost just trying to figure out how to begin. Any ideas or tips?
    Thank you!

  532. Good day! Do you know if they make any plugins to help with Search Engine Optimization?
    I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good success.

    If you know of any please share. Many thanks!

  534. Hey there! 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 methods to prevent hackers?

  542. Just want to say your article is as astounding. The clearness
    in your post is just excellent and i could assume you’re an expert on this subject.
    Fine with your permission let me to grab your feed to keep updated with forthcoming post.
    Thanks a million and please carry on the enjoyable work.

  550. You actually make it appear so easy along with your presentation however I to find this
    topic to be really one thing that I think
    I would by no means understand. It seems too complex and extremely large for me.
    I am taking a look forward to your subsequent post, I
    will attempt to get the hang of it!


  581. What’s up to all, how is all, I think every one is getting more from this website, and your views are
    fastidious in support of new people.

  590. Your style is so unique in comparison to other people I’ve read stuff from. Thanks for posting when you have the opportunity, Guess I will just book mark this blog.

  611. Thanks for finally writing about > Understanding Short-term Dynamics of Order Execution to Minimize Adverse Selection – Irene Aldridge – The Official Site < Loved it!

  615. Oh my goodness! Amazing article dude! Thank you, However I am
    experiencing problems with your RSS. I don’t understand why I can’t subscribe to it.
    Is there anyone else having similar RSS issues?
    Anyone that knows the solution can you kindly respond?
    Thanx!!

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

  639. It’s really a great and helpful piece of info. I am satisfied that you just shared this helpful info with us. Please stay us up to date like this. Thank you for sharing.

  641. Hello to all, the contents existing at this web page are actually amazing for people knowledge,
    well, keep up the good work fellows.

  643. I really love to read such an excellent article. Helpful article. child porn , Google porn , sex izle , Baby porn

  645. Wow, marvelous blog layout! How long have you been blogging for?
    you make blogging look easy. The overall look of your web site is magnificent, let
    alone the content!

  649. Appreciating the persistence you put into your site and detailed information you offer.
    It’s good to come across a blog every once in a while that isn’t the same out of date rehashed material.
    Wonderful read! I’ve bookmarked your site and I’m adding your RSS feeds to my Google account.

  652. Thank you great posting about essential oil. child porn , Google porn , sex izle , Baby porn

  656. I like the valuable info you provide in your articles.
    I will bookmark your weblog and check again here
    regularly. I am quite sure I will learn many new stuff right here!

    Best of luck for the next!

  660. I really like your writing style, excellent info, thank you for posting :D. “Your central self is totally untouched By grief, confusion, desperation.” by Vernon Howard.

  666. Great blog! Do you have any hints for aspiring writers?
    I’m planning to start my own site soon but I’m a little lost on everything.

    Would you suggest starting with a free platform like WordPress or
    go for a paid option? There are so many choices out there
    that I’m completely confused .. Any tips? Kudos!

  667. I needed to thank you for this fantastic read!!
    I certainly enjoyed every little bit of it. I’ve got
    you bookmarked to check out new things you post…

  670. Howdy this is kinda of off topic but I was wanting to know if blogs use WYSIWYG editors or if you have to manually code with HTML.
    I’m starting a blog soon but have no coding know-how so I wanted to get advice from someone with experience.
    Any help would be greatly appreciated!

  680. You have made some really good points there. I checked on the web for additional information about
    the issue and found most people will go along with your views on this site.

  683. What’s up to every body, it’s my first pay a visit of this weblog; this web site consists of amazing and in fact fine data designed for visitors.