Floppy disk jokes are always funny, especially when they’re about 5.25″s. This ad also happens to be one of the first photographs of robo-finance.
(via uneasysilence.com)
I saw that this paper on SSRN, High Frequency Trading and its Impact on Market Quality, was updated a week or so ago (courtesy of Alea) and I thought it would be worth posting. The abstract of the paper below:
This paper examines the impact of high frequency trading (HFT) on the U.S. equities market. I analyze a unique dataset to study the strategies utilized by high frequency traders (HFTs), their profitability, and their relationship with characteristics of the overall market, including liquidity, price discovery, and volatility. The 26 high frequency trading firms in the dataset participate in 73.7\% of all trades. I find the following key results: (1) HFTs tend to follow a price reversal strategy driven by order imbalances, (2) HFTs earn gross trading profits of approximately \$2.8 billion annually, (3) HFTs do not seem to systematically engage in a non-HFTr anticipatory trading strategy, (4) HFTs’ strategies are more correlated with each other than are non-HFTs’, (5) HFTs’ trading level changes only moderately as volatility increases, (6) HFTs add substantially to the price discovery process, (7) HFTs provide the best bid and offer quotes for a significant portion of the trading day and do so strategically so as to avoid informed traders, but provide only one-fourth of the book depth as do non-HFTs, and (8) HFTs may dampen intraday volatility. These findings suggest that HFTs’ activities are not detrimental to non-HFTs and that HFT tends to improve market quality.
J. Brogaard. High Frequency Trading and its Impact on Market Quality. Available at SSRN.
My gut instinct is that there are a few issues with the paper:
- As Jonathan acknowledges, he does not address order book dynamics or, more importantly, other identified malicious HFT practices (e.g., stuffing). Since this is a job paper and therefore has to be approachable and “bite-sized,” this in itself is fine. However, the normative claim that “HFTs are not bad” may be too strong in the absence of this analysis.
- Without a better idea of where HFTs trade, it is hard to extrapolate from the sample of 120 stocks. The exact selection method is not explicit in the paper, but it seems that the stocks were chosen from the NASDAQ to include a range of market caps. Without a better idea of where HFTs trade, it is quite possible that this selection undersamples the stocks that most HFT transactions occur on. In the absence of industry-wide data, this is a necessary research choice, but its limiting nature on the conclusions should be better stated.
- On a somewhat related note, the estimation of profitability and risk-adjusted return is quite daring given the above two constraints.
Despite these few notes, the paper should definitely get Jonathan a great job and I’m interested to see more work on his dataset. He’s also got a great advisor, Thomas Brennan, who I met at the Midwest Law & Economics Conference. Thomas has more industry experience than 90% of all academics and his papers also make for great reads (some on SSRN, most in law reviews or finance journals).
Since October has apparently been National Bash “Nobelist” Paul Krugman Month and I only have one more day left to get in on the action, here are my two cents on his column today, Accounting Identities.
OK, so here’s the bit:
To avoid all this, we’d need policies to encourage more spending. Fiscal stimulus on the part of financially strong governments would do it; quantitative easing can help, but only to the extent that it encourages spending by the financially sound, and it’s a little unclear what the process there is supposed to be.
Oh, and widespread debt forgiveness (or inflating away some of the debt) would solve the problem.
But what we actually have is a climate in which it’s considered sensible to demand fiscal austerity from everyone; to reject unconventional monetary policy as unsound; and of course to denounce any help for debtors as morally reprehensible. So we’re in a world in which Very Serious People demand that debtors spend less than their income, but that nobody else spend more than their income.
My understanding of this passage is that Krugman is arguing that we probably can’t avoid fundamental national accounting identities with austerity (UK) or indirect measures (QE1/2). However, his flippant suggestion in paragraph two above is that forgiving debt (of consumer debtors, I assume) would solve the problem by freeing up these actors to spend. Many countries around the world, ours included, have demonstrated that property rights and contract enforcement are sometimes “flexible” in times of crisis. Debt forgiveness, or a debt-to-equity swap more generally, can be reasonable tools if the rules for these credit events are determined a priori in a way that creditors can model.
However, for someone like Krugman to suggest widespread debt forgiveness as an ex-post government policy seems like an incredible affront to property rights and contract enforcement, the two basic legal principles that have been empirically demonstrated to produce real growth around the world (on both sides of the autocratic/democratic scale, by the way). Krugman may have named his column “the conscience of a liberal,” but I’d love to see what he thinks wealth demographics would look like after consumer credit markets disappear.
What would happen if you took the Index and Sector Summary Heatmap I made last week, blew it up to the size of a 36MP image (6000-by-6000), and then added a plot of the change in correlation over time. Great question! Look below.
Since there’s a lot going on here, let’s summarize what’s going on:
- Make sure you zoom into the figure! You can use the scroll wheel on your mouse or two-finger slide on your touchpad to quickly zoom in and out.
- Each diagonal cell shows the return of each asset over the past week (6 periods, 5 returns). As an asset increases, the line is colored green, and as an asset decreases, the line is colored red.
- The lower left hand corner of each diagonal cell shows the total return of the asset over the past week. There’s also a label down there, in case you’re zoomed in and can’t see the labels on the edge.
- The off-diagonal cells show the correlation (5-period return) between two assets. The color of the cell indicates the degree of correlation – more correlated assets are more green, and less correlated assets are more red. In case you’re zoomed in, there’s a label in the lower left hand corner that tells you which two assets you’re looking at.
- The off-diagonal cells also show the time series of 5-day return correlation over the past 4 weeks.
I’ve always toyed with the idea of buying one of the Grant’s Interest Rate Observer cartoons. The latest issue is out and here’s the new cartoon:
You can see the full archive of cartoons here.
I posted a script along with the Permanent Open Market Operation dataset that was designed to process the POMO XML data from the NYFRB historical data interface. However, this script required you to have already downloaded the data and put it in the proper location.
I’ve updated the script so that the most recent data is automatically retrieved directly from the NYFRB interface. You can get the code below:
Headline just hit the wire before 4:15pm:
“NYSE: Close In 58 ‘Symbols’ Delayed Following Hardware Recovery”
Remember those $500M cancelled transaction on SPY two weeks ago and the NYSE explanation? Get ready for another one.
First, some context – since ZH is the site that most frequently discusses POMO, I have been posting some of my work there in the comment sections pretty regularly. There’s typically quite a bit of “high quality click-through,” especially from some well-known firms in NYC and London. This morning, I posted a comment on my research from this morning on how the ZH’s Submitted/Accepted ratio post yesterday was not totally true on one of the usual ZH POMO posts. In under 30 seconds, it was deleted, and soon after the following email conversation began. Here are my two cents:
- When did ZH get serious about monetizing itself via ad revenue? Is there any talk of going public or is anyone interesting in forming a coalition to LBO them?!
- Since when should the null hypothesis be “conspiracy theory = true” ? Or did Tyler miss STATS100?
Tyler, 9:17am:We appreciate constructive and critical thought. If you would like to buy advertising space, however, to promote your blog, please advise
Me, 9:18am: How do I copy-paste the 1000 words necessary to properly respond into the comment section?
Tyler, 9:21am: I believe blasting every even remotely POMO related post with linkbacks is sufficient. Looking at a history of your comments for the past week shows behavior that some would characterize as self-promoting spam, which by the way is forbidden on zero hedge
Me, 9:25am: I won’t deny that it’s definitely strategic and will stop if it’s really a problem. You let plenty of crazier shit through, which only provides fodder for people who don’t want to believe you’re a credible source of information. I figured that the appearance of some reasonable and rigorous discussion in the comments would make both of us better off.
Tyler, 9:29am: By all means: however for you to post something with a headline that says “zero hedge is wrong” and to have a conclusion “the dollar volume and magnitude of the change are statistically significantly related to the POMO accepted-to-submitted ratio, but the direction is not really guaranteed” seems a little self defeating and itself is somewhat statistically suspect. Did you actually refute the null hypothesis?
As for people who don’t want to believe about ZH being a credible source of information, we really couldn’t give a rat’s ass, and wish them safe travels elsewhere.
Me, 9:33am: You mean I used a headline that was somewhat hyperbolic? Fair point but probably the pot calling the kettle black. As far as the data and numbers, I put all my data and code online, so anybody can download it and run it on their own.
Anyway, regardless of this tiff, thanks for what you do. The world is probably a better place for the site, not just in a feel-good bullshit kind of way.
N.B.: This seems like pretty clear fair use of these emails. If anyone thinks differently (e.g., Tyler(s)), feel free to let me know before calling your lawyer.