لایب سان

Author(s): Kissell, Robert

Publisher: Academic Press, Year: 2014

ISBN: 9780124016897,9780124016934,0124016936

Contents Preface .............................................................................................................................. xv Acknowledgments .......................................................................................................... xvii CHAPTER 1 Algorithmic Trading ........................................................................................ 1 Introduction ...................................................................................................................1 Changing Trading Environment ...................................................................................5 Recent Growth in Algorithmic Trading .....................................................................11 Investment Cycle ........................................................................................................15 Classifications of Algorithms .....................................................................................16 Types of Algorithms ...................................................................................................17 Algorithmic Trading Trends .......................................................................................20 Trading Venue Classification .....................................................................................21 Displayed Market ..................................................................................................21 Dark Pool ...............................................................................................................21 Grey Pool ...............................................................................................................21 Dark Pool Controversies........................................................................................22 Types of Orders ..........................................................................................................23 Execution Options.......................................................................................................23 The Trading Floor.......................................................................................................25 Algorithmic Trading Decisions ..................................................................................29 Macro-Level Strategies..........................................................................................29 Micro-Level Decisions ..........................................................................................33 Algorithmic Analysis Tools........................................................................................37 Pre-Trade Analysis ................................................................................................37 Intraday Analysis ...................................................................................................37 Post-Trade Analysis...............................................................................................38 Rule-Based Trading...............................................................................................38 Quantitative Techniques ........................................................................................38 High Frequency Trading.............................................................................................39 Auto Market Making .............................................................................................39 Quantitative Trading/Statistical Arbitrage ............................................................41 Rebate/Liquidity Trading ......................................................................................41 Direct Market Access .................................................................................................43 vii CHAPTER 2 Market Microstructure................................................................................... 47 Introduction ................................................................................................................ 47 Market Microstructure Literature .............................................................................. 49 The New Market Structure ........................................................................................ 51 Pricing Models ........................................................................................................... 56 Order Priority ............................................................................................................. 57 Equity Exchanges....................................................................................................... 57 New NYSE Trading Model ....................................................................................... 57 Designated Market Makers .................................................................................. 58 Supplemental Liquidity Providers........................................................................ 59 Trading Floor Brokers .......................................................................................... 60 NASDAQ Select Market Maker Program................................................................. 60 Empirical Evidence.................................................................................................... 61 Trading Volumes .................................................................................................. 61 Volume Distribution Statistics ............................................................................. 63 Day of Week Effect.............................................................................................. 65 Intraday Trading Profiles...................................................................................... 67 Special Event Days............................................................................................... 73 Flash Crash................................................................................................................. 76 Empirical Evidence from the Flash Crash ........................................................... 79 What Should Regulators Do to Safeguard Investors from Potential Future Flash Crashes? ........................................................................... 83 Comparison with Previous Crashes...................................................................... 84 Conclusion.................................................................................................................. 85 CHAPTER 3 Algorithmic Transaction Cost Analysis .......................................................... 87 Introduction ................................................................................................................ 87 What Are Transaction Costs?............................................................................... 87 What Is Best Execution? ...................................................................................... 88 What Is the Goal of Implementation?.................................................................. 89 Unbundled Transaction Cost Components................................................................ 89 Transaction Cost Classification ................................................................................. 92 Transaction Cost Categorization ............................................................................... 94 Transaction Cost Analysis ......................................................................................... 94 Measuring/Forecasting.......................................................................................... 96 Cost versus Profit and Loss.................................................................................. 97 Implementation Shortfall ........................................................................................... 97 Complete Execution ............................................................................................. 99 Opportunity Cost (Andre Perold)....................................................................... 100 Expanded Implementation Shortfall (Wayne Wagner) ..................................... 101 viii Contents Evaluating Performance............................................................................................105 Trading Price Performance..................................................................................105 Benchmark Price Performance............................................................................106 VWAP Benchmark ..............................................................................................106 Participation Weighted Price (PWP) Benchmark ...............................................108 Relative Performance Measure (RPM) ...............................................................109 Pre-Trade Benchmark..........................................................................................110 Index Adjusted Performance Metric ...................................................................111 Z-Score Evaluation Metric ..................................................................................112 Market Cost Adjusted Z-Score............................................................................113 Adaptation Tactic ................................................................................................114 Comparing Algorithms .............................................................................................115 Non-Parametric Tests ..........................................................................................116 Distribution Analysis ...........................................................................................123 Experimental Design.................................................................................................125 Proper Statistical Tests ........................................................................................126 Small Sample Size...............................................................................................126 Data Ties..............................................................................................................126 Proper Categorization ..........................................................................................127 Balanced Data Sets..............................................................................................127 Final Note on Post-Trade Analysis ..........................................................................127 CHAPTER 4 Market Impact Models.................................................................................129 Introduction ...............................................................................................................129 Definition ..................................................................................................................129 Example 1: Temporary Market Impact...............................................................130 Example 2: Permanent Market Impact ...............................................................130 Graphical Illustrations of Market Impact .................................................................131 Illustration 1—Price Trajectory ..........................................................................131 Illustration 2—Supply-Demand Equilibrium......................................................132 Illustration 3—Temporary Impact Decay Function............................................135 Example—Temporary Decay Formulation.........................................................137 Illustration 4—Various Market Impact Price Trajectories .................................138 Developing a Market Impact Model ........................................................................139 Essential Properties of a Market Impact Model .................................................140 Derivation of Models ................................................................................................142 Almgren & Chriss—Market Impact Model........................................................142 Random Walk with Price Drift—Discrete Time Periods ...................................143 Random Walk with Market Impact (No price drift) ..........................................144 I-Star Market Impact Model.....................................................................................146 ixContents Model Formulation .................................................................................................. 147 I-Star: Instantaneous Impact Equation ............................................................... 147 Market Impact Equation..................................................................................... 148 Underlying Data Set ........................................................................................... 154 Parameter Estimation Techniques ........................................................................... 157 Technique 1: Two-Step Process......................................................................... 157 Technique 2: Guesstimate Technique ................................................................ 160 Model Verification ............................................................................................. 160 CHAPTER 5 Estimating I-Star Model Parameters .......................................................... 163 Introduction .............................................................................................................. 163 Scientific Method..................................................................................................... 163 Step 1: Ask a Question....................................................................................... 164 Step 2: Research the Problem ............................................................................ 164 Step 3: Construct the Hypothesis ....................................................................... 164 Step 4: Test the Hypothesis................................................................................ 164 Step 5: Analyze the Data.................................................................................... 165 Step 6: Conclusion and Communication............................................................ 165 Solution Technique .................................................................................................. 166 The Question....................................................................................................... 166 Research the Problem......................................................................................... 166 Construct the Hypothesis.................................................................................... 171 Test the Hypothesis ............................................................................................ 173 Data Definitions.................................................................................................. 175 Universe of Stocks.............................................................................................. 176 Analysis Period................................................................................................... 176 Time Period ........................................................................................................ 176 Number of Data Points....................................................................................... 176 Imbalance............................................................................................................ 176 Side ..................................................................................................................... 177 Volume................................................................................................................ 177 Turnover.............................................................................................................. 177 VWAP................................................................................................................. 178 First Price............................................................................................................ 178 Average Daily Volume....................................................................................... 178 Annualized Volatility ......................................................................................... 178 Size...................................................................................................................... 179 POV Rate ............................................................................................................ 179 Cost ..................................................................................................................... 179 Estimating Model Parameters ............................................................................ 179 x Contents CHAPTER 6 Price Volatility..............................................................................................193 Introduction ...............................................................................................................193 Definitions.................................................................................................................194 Price Returns/Price Change.................................................................................194 Average Return....................................................................................................194 Volatility ..............................................................................................................196 Covariance ...........................................................................................................196 Correlation ...........................................................................................................197 Dispersion ............................................................................................................197 Value-at-Risk .......................................................................................................197 Implied Volatility ................................................................................................198 Beta ......................................................................................................................198 Market Observations—Empirical Findings..............................................................199 Forecasting Stock Volatility .....................................................................................202 Volatility Models.................................................................................................202 HMA-VIX Adjustment Model..................................................................................206 Determining Parameters via Maximum Likelihood Estimation.........................208 Measuring Model Performance ................................................................................209 Root Mean Square Error (RMSE).......................................................................210 Root Mean Z-Score Squared Error (RMZSE) ....................................................210 Outlier Analysis ...................................................................................................211 Results..................................................................................................................211 Problems Resulting from Relying on Historical Market Data for Covariance Calculations ................................................................................214 Factor Models ...........................................................................................................221 Types of Factor Models............................................................................................227 CHAPTER 7 Advanced Algorithmic Forecasting Techniques............................................235 Introduction ...............................................................................................................235 Trading Cost Equations ............................................................................................235 Model Inputs........................................................................................................236 Trading Strategy........................................................................................................237 Percentage of Volume .........................................................................................237 Trading Rate ........................................................................................................238 Trade Schedule ....................................................................................................238 Comparison of POV rate to Trade Rate..............................................................239 Trading Time ............................................................................................................239 Trading Risk Components ........................................................................................240 xiContents Trading Cost Models—Reformulated ......................................................................241 Market Impact Expression...................................................................................241 Timing Risk Equation...............................................................................................243 Timing Risk for a Basket of Stock .....................................................................248 Comparison of Market Impact Estimates.................................................................248 Volume Forecasting Techniques ..............................................................................251 Daily Volumes .....................................................................................................251 Forecasting Monthly Volumes .................................................................................258 Forecasting Covariance.............................................................................................263 Efficient Trading Frontier.........................................................................................265 Single Stock Trade Cost Objective Function......................................................267 Portfolio Trade Cost Objective Function............................................................267 CHAPTER 8 Algorithmic Decision Making Framework ....................................................269 Introduction ...............................................................................................................269 Equations...................................................................................................................270 Algorithmic Decision Making Framework ..............................................................272 1) Select Benchmark Price ..................................................................................272 Comparison of Benchmark Prices.......................................................................276 2) Specify Trading Goal......................................................................................276 3) Specify Adaptation Tactic ..............................................................................284 Comparison across Adaptation Tactics...............................................................293 Modified Adaptation Tactics...............................................................................294 How Often Should We Re-Optimize Our Tactics? ............................................294 CHAPTER 9 Portfolio Algorithms.....................................................................................297 Introduction ...............................................................................................................297 Trader’s Dilemma .....................................................................................................298 Variables ..............................................................................................................299 Transaction Cost Equations ......................................................................................300 Market Impact......................................................................................................301 Price Appreciation ...............................................................................................301 Timing Risk .........................................................................................................302 One-Sided Optimization Problem .......................................................................302 Optimization Formulation.........................................................................................302 Constraint Description.........................................................................................303 Portfolio Optimization Techniques ..........................................................................306 Quadratic Programming Approach .....................................................................306 Trade Schedule Exponential................................................................................308 Residual Schedule Exponential ...........................................................................309 xii Contents Trading Rate Parameter.......................................................................................310 Comparison of Optimization Techniques ...........................................................312 Portfolio Adaptation Tactics.....................................................................................316 Description of AIM and PIM for Portfolio Trading...........................................317 How Often Should We Re-Optimize? ................................................................319 Managing Portfolio Risk...........................................................................................320 Minimum Trading Risk Quantity........................................................................322 Maximum Trading Opportunity ..........................................................................323 When To Use These Values? ..............................................................................324 Program-Block Decomposition ...........................................................................325 Appendix ...................................................................................................................328 CHAPTER 10 Portfolio Construction ................................................................................331 Introduction ...............................................................................................................331 Portfolio Optimization and Constraints....................................................................332 Transaction Costs in Portfolio Optimization............................................................335 Portfolio Management Process .................................................................................339 Example: Efficient Trading Frontier w/ and w/o Short Positions......................340 Example: Maximizing Investor Utility ...............................................................340 Trading Decision Process .........................................................................................341 Unifying the Investment and Trading Theories .......................................................343 Cost-Adjusted Frontier..............................................................................................348 Determining the Appropriate Level of Risk Aversion.............................................350 Best Execution Frontier ............................................................................................351 Portfolio Construction with Transaction Costs ........................................................352 Quest for best execution frontier.........................................................................354 Conclusion.................................................................................................................359 CHAPTER 11 Quantitative Portfolio Management Techniques.......................................361 Introduction ...............................................................................................................361 Are the Existing Models Useful Enough for Portfolio Construction? ....................363 Current State of Vendor Market Impact Models ................................................364 Pre-Trade of Pre-Trades ...........................................................................................367 Estimation Process...............................................................................................368 Applications .........................................................................................................372 How Expensive Is It To Trade? ...............................................................................374 Acquisition and Liquidation Costs......................................................................377 Portfolio Management—Screening Techniques .................................................380 xiiiContents MI Factor Scores.......................................................................................................384 Derivation of the MI Factor Score for Shares ....................................................384 Current State of MI Factor Scores ......................................................................386 MI Factor Score Analysis....................................................................................386 Alpha Capture Program ............................................................................................388 Alpha Capture Curves .........................................................................................393 CHAPTER 12 Cost Index and Multi-Asset Trading Costs.................................................395 Introduction ...............................................................................................................395 Cost Index .................................................................................................................396 Normalization Process.........................................................................................399 Real-Time Cost Index...............................................................................................403 Back-Testing........................................................................................................407 Market Impact Simulation...................................................................................410 Multi-Asset Class Investing......................................................................................415 Investing in Beta Exposure and other Factors ....................................................415 Beta Investment Allocation .................................................................................419 Multi-Asset Trading Costs........................................................................................420 CHAPTER 13 High Frequency Trading and Black Box Models........................................429 Introduction ...............................................................................................................429 Data and Research ....................................................................................................431 Strategies ...................................................................................................................432 Statistical Arbitrage .............................................................................................432 Triangular Arbitrage ............................................................................................436 Liquidity Trading.................................................................................................439 Market-Neutral Arbitrage ....................................................................................440 Index and Exchange Traded Fund Arbitrage......................................................442 Merger Arbitrage .................................................................................................443 Evaluation .................................................................................................................446 Summary ...................................................................................................................450 References....................................................................................................................... 453 Index ............................................................................................................................... 465

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