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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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New research from AbleMarkets shows that stocks with higher participation of aggressive High-Frequency Traders (HFT) experience higher intraday volatility. The new study compares intraday volatility, as measured by the difference between the daily high and low and normalized by the daily closing price, with aggressive HFT participation captured by AbleMarkets aggressive HFT index. Every 1% increase in AbleMarkets aggressive HFT index on a given trading day on average corresponds to 2% increase in volatility on the same day across all of the S&P 500 stocks. Aggressive HFTs comprise a set of trading strategies that use predominantly market orders (as opposed to limit orders) to executeRead More →

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In: Big Data, HFT, Risk
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Market microstructure is traditionally thought to aid execution traders and market makers, the two types of intraday financial practitioners continuously interfacing within the markets. For longer-term investors, such as pension funds and long-only hedge funds’ portfolio managers, market microstructure is usually not considered to be a variable in portfolio optimization. However, the latest research from AbleMarkets.com shows that long-only managers ignore the effects of market microstructure at the expense of their clients’ portfolios. This note summarizes the latest findings. First of all, what is market microstructure? In broad terms, the science of market microstructure that examines the evolution of orders and order matching that occurRead More →

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In: HFT, Risk
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Aggressive high-frequency trading (HFT) is a classification of electronic trading strategies that rely on ultra-fast infrastructure and market orders to take advantage of news, predictive analytics or short-lived information asymmetries. Unlike passive HFTs that tend to provide market-making services, aggressive HFTs’ models attempt to reach the markets prior to others to capitalize on short-term market inefficiencies. AbleMarkets.com Aggressive HFT Index tracks aggressive HFT activity in real time and has developed statistical insights into aggressive HFT behavior, some of which are summarized in this article. Among the S&P 500 stocks, for instance, aggressive HFTs are more prevalent in equities with a) Higher prices b) Lower dividendRead More →

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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, Risk
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Traditional variables taken into consideration by investors have included growth prospects, competition, recent earnings, dividends, long-term volatility and the like. Fairly recently, investor relations began taking into account and explaining shorter-term market moves, such as the stock’s responses to market-wide events. Lately, however, this information is no longer sufficient. Today’s institutional investors increasingly care about the comparative intraday price dynamics of stocks, including participation of aggressive high-frequency traders and the stock’s propensity for flash crashes. Aggressive high-frequency traders are the ultra-fast mostly automated trading systems that are capable of swooping in and out of a stock at lightning speed. Aggressive high-frequency traders have been shownRead More →

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In: Big Data, HFT, Risk
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Recent market moves left many buy-side investors puzzled and wanting for more information. Was the extreme volatility observed in the Fall of 2014 a gust of wind or a hurricane, a harbinger of further price swings to come? Our research, AbleMarkets.com, provides answers. Take an absolutely ordinary day, Monday, October 13, 2014. It was Columbus Day, a banking holiday, when stock markets are open, nevertheless. Typically, Columbus Day is a quiet trading day, with little news to move the securities prices. This day was no different: the only event listed on Bloomberg LP was a speech by Chicago Federal Reserve Bank President Charles Evans. Dr.Read More →

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In: HFT, Quant, Risk
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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 →

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In: Quant, Risk
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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 →