Friday, August 23, 2013

Backtest (empirical analysis) purposes

Coming from a institutional proprietary trading standpoint, here I attempt to clarify purposes of backtests.

Main Purposes

Software debugging

This is about 95% of why we need backtests, to make sure that the developed trading platform does what it's supposed to do, e.g. enforcing limits, applying logic correctly.

Implementation Shortfall analyasis

Estimating performance decay with respect to latency, competition, etc.

What backtesting is NOT for


Friday, August 9, 2013

Dark Pools (Book Review)

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson has been one of the most interesting books I've read this year on the subject of high frequency trading. It explains the history of US exchanges going from floor to electronic, and some of the key (and awesome) people who helped shape the trading environment today.

Some key players

Haim Bodek: A star developer/trader at Hull/Goldman, who specialized in options market making. The book explains his experience at Trading Machines being picked off by competing algorithms due to microstructure disadvantages.

Joshua Levine: Mentioned in "Top 10 Financial Technology Innvators of the Decade", this is a t-shirt and jeans computer science genius who created Island ECN, which effectively changed the way NASDAQ stocks were traded, and broke up the floor market makers' control over order flow of the old days. He still updates his blog at

GETCO: Now part of KCG Holdings, GETCO was founded by a couple of ex-floor traders Stephen Schuler, Daniel Tierney who understood the potential of electronic trading, and has been one of the most successful firms who specialize in Automated Market Making (AMM). It was estimated in 2007 that their average daily net profit had averaged about $7M USD.

Key money making strategies mentioned

Market Making & high speed arbitrage off exchange microstructure inefficiencies. The book explores tenets around these core principles, and examples of those who had successfully implemented them.