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In: Big Data, HFT, Regulation, Risk
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Over the last few years, a number of exchanges and dark pools emerged claiming that their businesses will exclude high-frequency traders (HFTs) detrimental to institutional investors. Almost invariably, the HFTs in question happened to be the so-called Aggressive HFTs: HFTs that execute mostly using market orders and have been shown to erode liquidity, causing short-term volatility in the process. While the idea of excluding aggressive HFTs may be appealing to investors, the realities of modern microstructure preclude this from happening, as this article discusses. As a result, most of today’s exchanges in the United States have a similar proportion of aggressive HFTs by volume ofRead More →

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In: HFT, Quant, Regulation, Risk
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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 →

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The new revelations surrounding the Flash Crash of May 6, 2010, once again brought to light an undeniable fact: U.S. regulators desperately need to boost their real-time surveillance capabilities. Nearly five years has elapsed between the time the London-based Navinder Singh Sarao, allegedly influenced the Flash Crash and the government identification of this event! Gone are the days when market issues could be analyzed by a team watching for on-screen images of market events. Regulatory agencies are ill-equipped to handle real-time issues in a timely manner. However, market solutions, such as AbleMarkets.com suite of real-time products are designed to spot market microstructure issues, such asRead More →

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In: Big Data, HFT, Regulation, Risk
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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 largerRead More →

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In: Big Data, HFT, Regulation, Risk
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By Irene Aldridge Many investors are rightfully concerned about market manipulation — after all, who wants to be taken for a ride? High-frequency market manipulation proved to be particularly disconcerting to many investors as it is evolutionary, difficult to detect without appropriate tools, and is still not universally understood. Adding even more complexity to investor decision-making is the explosion of various types of exchanges and other alternative trading venues, some known as dark pools. As my latest research shows, however, certain types of trading venues can be more suited to specific classes of investors. Investors may further select to trade on venues that minimize undesiredRead More →

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In: Big Data, HFT, Quant, Regulation, Risk
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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 →

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In: Big Data, HFT, Regulation, Risk
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By Irene Aldridge It’s not a secret that many pension fund, mutual fund and hedge fund managers are concerned about high-frequency traders (HFTs). While their concerns are many, perhaps the biggest uncertainty involves the actual extent of HFT participation in the markets, their identities and their intent. While some claim that HFTs comprise 60-70% of all market participants, such numbers are seldom reached in reality. Scientific examinations find that HFTs still account for as little as 25% of all market activity in such frequently traded instruments as the S&P 500 E-mini futures (see Kirilenko et al., 2011). As Figure 1 shows, even in the veryRead More →

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In: HFT, Quant, Regulation, Risk
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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 →

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In: Quant, Regulation
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By Irene Aldridge Over the past three years, much of the online and cocktail party chatter has buzzed around the when to expect inflation. Everyone has long agreed that high inflation is inevitable, gold ETFs have been snapped up and prices driven to the sky by hedgers, yet month after month the level of inflation remains precariously low. According to the quantitative determinants of inflation the Fed adjusts money supply in response to oil prices, as such, with rising oil prices we can expect the Fed to take measures to reduce inflation expectations. Inflation is a function of many variables, with the amount of moneyRead More →

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In: Regulation
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By Irene Aldridge About the time of the “flash crash” of May 6, 2010, many small investors appear to have left the U.S. stock markets, according to a recent Wall Street Journal article. The Financial Reform Bill, passed and celebrated with much fanfare last week, is sometimes thought to help bring those investors and their cash back into the equity markets. This articles takes a close look at the likely causes underlying the investor exodus, the Bill and its probable effect on investor behavior. First, a bit about the Bill. The Financial Reform Bill is certainly an accomplishment for the current administration. Earning a consensusRead More →