Why Big Data Matters in Finance

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 be assigned to data science – the researchers’ ability to identify the winner ahead of time based on quantitative metrics.

At its core, the data science behind the horse’s win is similar to the methods deployed by modern analysts of financial markets. By observing and measuring recurring characteristics and phenomena in the financial markets, data scientists are able to pinpoint winning stocks, predict market crashes, detect market manipulation and the like.

With time, financial data analysis is becoming increasingly precise and data-intensive. This is in part driven by ever-plummeting costs of technology required to crunch data, by ever expanding data availability, and by the success of data science in financial operations. Big data analyses often drift to the shortest time frames, involving data captured in milliseconds and microseconds. Firms like Getco, Virtue and Quantlab have short-term data analyses over the past couple of decades. Not only institutions benefit from the advantages of short-term financial data analyses; smaller investors can benefit, as well.

Why would ordinary investors care about big data in Finance, and big data at high frequencies, in particular? To answer this question, consider an average investor, Joe, who desires to do something mundane: buy or sell a stock or another financial instrument at the market open prices. To do so, Joe has two methods at his disposal:
1) Joe can place a market order that tells his broker or an exchange to fill his order as soon as possible at the best price available.
2) Joe can place a limit order specifying a particular price, but no time limit for his trade.

If Joe chooses the market order route, he is guaranteed to have bought his desired security, but possibly at a much worse price than the opening bid or even ask price. During the few minutes immediately following the market opening prices strive to incorporate all of the information pent up from overnight, when the markets are closed. The information is transmitted into the markets via traders’ orders, and the disparity of views causes the prices to bounce violently up and down briefly, until the traders reach a consensus on prices. Due to the volatility, a market-order Joe may be filled at the worst possible price, possibly erasing Joe’s projected gain from the trade.

As an alternative, Joe may choose to place a limit order and specify the price at which he is willing to buy the financial instrument of interest. Here, Joe is facing another decision, the price itself. If Joe chooses a price that is too low, his order may never execute. If the price is too high, he does nothing to outperform his market-order scenario. How can Joe determine a price that is just right, that is, both favorable and results in a timely execution?

A simple, yet effective strategy could be to place a limit order at a “mid-price”: a price that is the average of the bid and ask at the market open. To do so, however, one needs a timely source of market data, from which to calculate the mid-price. (Most brokers provide their clients with free access to data that is 15 minutes delayed – too slow for Joe to successfully identify and execute upon his strategy.) This basic example illustrates just one big high-frequency data application that, over time, can make a million-dollar difference in accounts of investors who embrace the data and those who do not. The mantra of today’s investors in financial and horse markets alike may be “keep data science, and choose to trade the assets according to the science’s predictions.”

What other inferences can one make from market data using data science? The possibilities are limitless. Like in any field of research, identifying working models involves lots of trial and error, data observation, and, eventually, intuition about what works and what does not. The data is the first necessary stepping stone.

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

72 Comments




  1. I’ll right away grasp your rss feed as I can’t find your email subscription link or e-newsletter service.
    Do you’ve any? Kindly allow me understand so that I may just subscribe.
    Thanks.

  2. strattera cialis wellbutrin

  3. hello!,I like your writing very much! percentage we keep up a correspondence more approximately your post on AOL? I require an expert in this space to unravel my problem. Maybe that’s you! Looking ahead to look you.

  4. I’ve been surfing on-line greater than three hours as of
    late, yet I never discovered any attention-grabbing article like yours.

    It’s pretty worth sufficient for me. In my opinion, if all website owners and bloggers made good content material as you did, the web
    will likely be a lot more useful than ever before.


  5. I just could not depart your web site prior to suggesting that I extremely enjoyed the usual information an individual supply for your visitors? Is gonna be back often in order to inspect new posts


  6. Hi there! Quick question that’s totally off topic.
    Do you know how to make your site mobile friendly? My web site looks weird when viewing from my iphone.
    I’m trying to find a theme or plugin that might be able to resolve this problem.
    If you have any recommendations, please share. Thanks! https://tadalafili.com/

  7. What’s Happening i am new to this, I stumbled upon this I have found It absolutely helpful and it has aided me out loads. I am hoping to contribute & aid different users like its helped me. Good job. リアルラブドール


  8. This website certainly has all the info I wanted concerning this subject and didnít know who to ask.




  9. Someone essentially lend a hand to make severely posts I might state. That is the first time I frequented your website page and thus far? I surprised with the analysis you made to create this particular post incredible. Excellent job!|




  10. I needed to thank you for this very good read!! I certainly enjoyed every little bit of it. I’ve got you bookmarked to look at new stuff you postÖ

  11. We stumbled over here different web address and thought I should check things out. I like what I see so i am just following you. Look forward to looking at your web page for a second time.|

  12. I just like the helpful information you supply for your articles. I’ll bookmark your blog and check again here frequently. I’m moderately certain I will be told a lot of new stuff right here! Best of luck for the next!

  13. I really like your blog.. very nice colors &
    theme. Did you make this website yourself or did you hire someone to
    do it for you? Plz respond as I’m looking to create my own blog and would like how to pass hp0-j23 exam (Faustino) find out where u got this from.
    many thanks

  14. Generally I do not read post on blogs, but I wish to say that this write-up very forced me to try and do so! Your writing style has been amazed me. Thanks, very nice article.

  15. Oh my goodness! Incredible article dude! Thank you, However I am
    encountering difficulties with your RSS. I don’t know why
    I am unable to subscribe to it. Is there anyone
    else having the same RSS issues? Anyone that knows the solution can you kindly respond?
    Thanx!!

    Look at my page; certified nursing (Angus)



  16. When I initially commented I seem to have clicked the -Notify me when new comments are added- checkbox and from now on each time a comment is added I receive 4 emails with the same comment. There has to be a way you are able to remove me from that service? Cheers!


  17. This is a topic that’s close to my heart… Thank you! Where are your contact details though?

Leave a Reply

Your email address will not be published.