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HigH-FrequencyTrading
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Founded in 1807, John Wiley & Sons is the oldest independent publishing com-pany in the United States. With offces in North America, Europe, Australia, andAsia, Wiley is globally committed to developing and marketing print and electronicproducts and services for our customers’ professional and personal knowledgeand understanding.The Wiley Trading series features books by traders who have survived themarket’s ever changing temperament and have prospered—some by reinventingsystems, others by getting back to basics. Whether a novice trader, professional,or somewhere in-between, these books will provide the advice and strategiesneeded to prosper today and well into the future.For a list of available titles, visit our web site at www.WileyFinance.com.
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HigH-FrequencyTradingSecond ediTionA Practical Guide to AlgorithmicStrategies and Trading SystemsIrene Aldridge
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Cover image: © Crusitu Robert/iStockphotoCover design: John Wiley & Sons, Inc.Copyright © 2013 by Irene Aldridge. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.The First Edition of High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systemswas published by John Wiley and Sons, Inc. in 2010.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permittedunder Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written per-mission of the Publisher, or authorization through payment of the appropriate per-copy fee to the CopyrightClearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600,or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011,fax (201) 748-6008, or online at www.wiley.com/go/permissions.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best eforts inpreparing this book, they make no representations or warranties with respect to the accuracy or completenessof the contents of this book and specifcally disclaim any implied warranties of merchantability or ftness for aparticular purpose. No warranty may be created or extended by sales representatives or written sales materi-als. The advice and strategies contained herein may not be suitable for your situation. You should consult witha professional where appropriate. Neither the publisher nor author shall be liable for any loss of proft or anyother commercial damages, including but not limited to special, incidental, consequential, or other damages.For general information on our other products and services or for technical support, please contact ourCustomer Care Department within the United States at (800) 762-2974, outside the United States at(317) 572-3993 or fax (317) 572-4002.Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material includedwith standard print versions of this book may not be included in e-books or in print-on-demand. If this bookrefers to media such as a CD or DVD that is not included in the version you purchased, you may download thismaterial at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.Library of Congress Cataloging-in-Publication Data:Aldridge, Irene, 1975–High-frequency trading: a practical guide to algorithmic strategies and trading systems/IreneAldridge.—2nd Edition.pages cm.—(Wiley trading series)Includes index.ISBN 978-1-118-34350-0 (Cloth)—ISBN 978-1-118-42011-9 (ebk)—ISBN 978-1-118-43401-7 (ebk)—ISBN 978-1-118-41682-2 (ebk) 1. Investment analysis. 2. Portfolio management. 3. Securities.4. Electronic trading of securities. I. Title.HG4529.A43 2013332.64—dc232012048967Printed in the United States of America10 9 8 7 6 5 4 3 2 1
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To my family
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C o n t e n t sPreface xiAcknowledgments xiiiChapter 1 how Modern Markets Difer from those past 1Media, Modern Markets, and HFT 6HFT as Evolution of Trading Methodology 7viiWhat Is High-Frequency Trading? 13What Do High-Frequency Traders Do? 15How Many High-Frequency Traders Are There? 17Major Players in the HFT Space 17Organization of This Book 18Summary 18End-of-Chapter Questions 19Chapter 2 technological Innovations, systems, and hFt 21A Brief History of Hardware 21Messaging 25Software 33Summary 35End-of-Chapter Questions 35Chapter 3 Market Microstructure, orders, andLimit order Books 37Types of Markets 37Limit Order Books 39Aggressive versus Passive Execution 43Complex Orders 44Trading Hours 45Modern Microstructure: Market Convergence and Divergence 46
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Fragmentation in Equities 46Fragmentation in Futures 50Fragmentation in Options 51Fragmentation in Forex 51Fragmentation in Fixed Income 51Fragmentation in Swaps 51Summary 52End-of-Chapter Questions 52Chapter 4 high-Frequency Data 53What Is High-Frequency Data? 53How Is High-Frequency Data Recorded? 54Properties of High-Frequency Data 56High-Frequency Data Are Voluminous 57High-Frequency Data Are Subject to the Bid-Ask Bounce 59High-Frequency Data Are not normal or Lognormal 62High-Frequency Data Are Irregularly Spaced in Time 62Most High-Frequency Data Do not ContainBuy-and-Sell Identifers 70Summary 73End-of-Chapter Questions 74viii Chapter 5 trading Costs 75Overview of Execution Costs 75Transparent Execution Costs 76Implicit Execution Costs 78Background and Defnitions 82Estimation of Market Impact 85Empirical Estimation of Permanent Market Impact 88Summary 96End-of-Chapter Questions 96Chapter 6 performance and Capacity of high-Frequencytrading strategies 97Principles of Performance Measurement 97Basic Performance Measures 98Comparative Ratios 106Performance Attribution 110Capacity Evaluation 112Alpha Decay 116Summary 116End-of-Chapter Questions 116Chapter 7 the Business of high-Frequency trading 117Key Processes of HFT 117COnTEnTS
