Just 10 years ago, finance was a small-data discipline. The small-data approach was partly due to the actual lack of data. To most investors, exchanges offered only four prices per stock per day: Open, High, Low and Close, and all of those were reported the following day (on the T+1 basis). Even the largest market makers did not store intraday data beyond what was mandated by regulators. Commodity trading floors, for instance, had only 21 days of history on hand until approximately five years ago. Finance Ph.D. programs almost exclusively taught analysis of closing prices, mentioning intraday variations only in passing. Today, real-time streaming dataRead More →

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 onRead More →

By Irene Aldridge   Big Data is the new Big Bang. It is a buzzword that has exploded into every discipline that process expansive data sets. Computing, medical sciences, biology, and advertising are adjusting their methodologies to harness the ever expanding processing power that is available. In finance, the data is omnipresent: exchanges generate tick data, news services deliver real-time machine readable newsfeeds, and Internet traffic analysts produce sentiment feeds. Even the United States Federal Reserve has seemingly jumped on the big data wagon and is producing more data points than ever before. All of this is a great thing. Big data generates transparency, itRead More →

By Irene Aldridge As a high-frequency trader I often weigh the risks of HFT. Some of these considerations are generated by the obvious desire to contain the risks of my operation and thereby enhance profitability and attractiveness to prospective partners and investors. Alternative concepts are driven by the proposals of third-parties, who are often individuals that view HFT as a threat. In this note I explore the real and the imagined risks from the impact of HFT — specifically and externally. As I discuss in my new book, High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems, 2nd Edition (Wiley, ISBN: 978-1118343500), mostRead More →

By Irene Aldridge Opinions on high-frequency trading still run the gamut. On one end of the spectrum we find individuals such as Mark Cuban, a successful Dallas-based businessman, who recently proclaimed that he is afraid of high-frequency traders. Mr. Cuban’s fears are based on his belief that high-frequency traders are nothing more than “hackers,” seeking to game the markets and take unfair advantage of systems and investors. On the other extreme are employers in the financial services industry. Just open the “Jobs” page in “Money and Investment” section in the Wall Street Journal, and all you will find are job postings seeking talent for high-frequencyRead More →

By Irene Aldridge Recent arguments accuse high-frequency traders (HFTs) of a specific market distortion scheme. The HFTs, the argument goes, use their soon-to-be-cancelled limit orders to mislead large investors about the shape of the supply and demand curve. This HFT strategy is purported to work as follows: 1) an HFT posts lots of limit orders on both the bid and the ask sides of the trades; 2) once the large trader’s market order hits the bid (or lifts the offer), the HFT now knows that the large trader is now selling (or buying); 3) the HFT cancels all other limit orders and starts aggressively tradingRead More →

By Irene Aldridge Many articles on the subject of money talk about different ways to invest the money: which stocks to pick, whether to choose bonds over stocks and Exchange-Traded Funds (ETFs) versus mutual funds. Few of the pieces, however, address the key issue underlying any allocation which may be keeping investors up at night: the implicit costs of placing their money into someone else’s hands. Any investment decision amounts to just that: transferring money into someone else’s care. When purchasing stock of a particular company, an investor transfers his money to the management of the stock-issuing corporation with the sole hope that the managementRead More →

By Irene Aldridge Several decades back, managing investment risk was straightforward by today’s standards. A simple strategy of “don’t put all your eggs into the same basket” worked well: invest into many stocks with different businesses, the thinking went, and reap the rewards of positive returns in all market conditions. The key underlying premises of “multiple baskets” investing were two-fold: Stocks of companies in different industries rarely moved in tandem; and Most stocks were expected to rise in the long term. Today, neither of the two principles holds: Many companies and their stocks face an uncertain future, and lots of stocks sway together in responseRead More →

By Irene Aldridge Present economic conditions leave much to be desired: Europe is trying to resolve its debt problems, and the U.S. has seen much better times in terms of employment rates and consumer confidence. Against this backdrop of economic calamities, the financial markets are experiencing high volatility, seesawing up and down, gaining and losing in excess of 3% on a given day. Whether the current volatility is without a precedent, however, is up for a debate and depends on how volatility is measured. The most common way to assess volatility is via standard deviation, a square root of the average of squared deviations ofRead More →

By Irene Aldridge The latest turmoil observed in the European and U.S. markets may be symptomatic of a broader problem: changing behavior in financial securities. Historically, prices of unrelated securities used to rise and fall independently of each other and without great influence from the broader markets. Recent studies show that when markets rise, individual stocks still behave differently: some rise and some fall. Yet, when today’s markets fall, most stocks tend to fall in unison, amplifying negative performance of individual equities. The shifting risk-return characteristics of financial markets may influence the outcomes of investing styles, and change the way people look at markets forRead More →