Monday, September 19, 2011

More on HFT(High Frequency Trading) core strategies

Prof. Brogaard, a relatively known scholar within mathematical finance community, has published as part of the UK Foresight project titled “High Frequency Trading, Information and Profits.” Here the writer explains some core logic applied by existing firms at a level above orderbook HFT logic.

HFT basic strategies

1) Market Making : This is about getting paid from market orders (bid/offer spread) for liquidity provision.

2) Liquidity Rebates: Getting paid from the exchange with respect to liquidity provision.This is why understanding individual exchange fee-structure is critical to making money.

3) Statistical pattern detection: This is probably the most volatile of all strategies. From personal experience, "statistical significance" is always questionable around market data samples.

4) Pure Arbitrage: Inter-exchange, inter-continental, inter-instrument... it all takes very high speed to pull off today, as price discrepancies between "obvious" arbitrage opportunities have become very tight.

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