Empirical Limitations on High Frequency Trading Profitability

Addressing the ongoing examination of high-frequency trading practices in financial markets, we report the results of an extensive empirical study estimating the maximum possible profitability of the most aggressive such practices, and arrive at figures that are surprisingly modest. By "aggressive" we mean any trading strategy exclusively employing market orders and relatively short holding periods. Our findings highlight the tension between execution costs and trading horizon confronted by high-frequency traders, and provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. Our study employs a number of novel empirical methods, including the simulation of an "omniscient" high-frequency trader who can see the future and act accordingly

Secondary market trading infrastructure of government securities

The subject of our study is the trading infrastructure of government securities markets, which has undergone fundamental changes driven by the appearance of non-exchange electronic platforms and the rapid rise of their share in the trading volume of developed markets. The summary of the relevant literature indicates that improved trading transparency clearly increases the efficiency of the market (its role in price discovery). Its effect on market liquidity, however, is less clear-cut. While the loss of anonymity most likely decreases liquidity, transparency on the quantity and price of concluded transactions enhances liquidity. The emergence of electronic trading on developed government securities markets has not changed the fundamental structure of trading, which continues to take place in two segments: between dealers (B2B) and between dealers and clients (B2C). There is, however, no interbank trading platform on the Hungarian government securities market, although data vendors and other platforms serving clients have sprung up. Nonetheless, more than 90 per cent of trading takes place through traditional OTC channels. Consequently, actors which are interested in market processes and prices, but do not actively trade on the Hungarian market have trouble accessing high-standard, quasi-real-time price information. The MiFID initiative – launched at the European level – may contribute to improving the Hungarian market’s transparency by engendering the regulation of the bond market similar to that of the equity market. Introduction of the euro in Hungary will fundamentally change the country’s market structure. The sovereign debt manager’s leeway will increase, and the key direct actors on the government securities market are expected to be the major international actors, which are interested in the centralisation of government securities trading by currencies. Based on the broad electronisation of the euro-denominated government securities market, it is likely that electronic platforms will also gain ground on the Hungarian market, following the introduction of the single currency at the latest.government securities market, secondary trading, transparency, efficiency, market liquidity.

The total cost of trading Belgian shares: Brussels versus London

international financial markets;shares;costs

Optimal High Frequency Trading in a Pro-Rata Microstructure with Predictive Information

We propose a framework to study optimal trading policies in a one-tick pro-rata limit order book, as typically arises in short-term interest rate futures contracts. The high-frequency trader has the choice to trade via market orders or limit orders, which are represented respectively by impulse controls and regular controls. We model and discuss the consequences of the two main features of this particular microstructure: first, the limit orders sent by the high frequency trader are only partially executed, and therefore she has no control on the executed quantity. For this purpose, cumulative executed volumes are modelled by compound Poisson processes. Second, the high frequency trader faces the overtrading risk, which is the risk of brutal variations in her inventory. The consequences of this risk are investigated in the context of optimal liquidation. The optimal trading problem is studied by stochastic control and dynamic programming methods, which lead to a characterization of the value function in terms of an integro quasi-variational inequality. We then provide the associated numerical resolution procedure, and convergence of this computational scheme is proved. Next, we examine several situations where we can on one hand simplify the numerical procedure by reducing the number of state variables, and on the other hand focus on specific cases of practical interest. We examine both a market making problem and a best execution problem in the case where the mid-price process is a martingale. We also detail a high frequency trading strategy in the case where a (predictive) directional information on the mid-price is available. Each of the resulting strategies are illustrated by numerical tests

Trade-throughs in European cross-traded equities after transaction costs – empirical evidence for the EURO STOXX 50

This paper investigates the accuracy and heterogeneity of output growth and inflation forecasts during the current and the four preceding NBER-dated U.S. recessions. We generate forecasts from six different models of the U.S. economy and compare them to professional forecasts from the Federal Reserve’s Greenbook and the Survey of Professional Forecasters (SPF). The model parameters and model forecasts are derived from historical data vintages so as to ensure comparability to historical forecasts by professionals. The mean model forecast comes surprisingly close to the mean SPF and Greenbook forecasts in terms of accuracy even though the models only make use of a small number of data series. Model forecasts compare particularly well to professional forecasts at a horizon of three to four quarters and during recoveries. The extent of forecast heterogeneity is similar for model and professional forecasts but varies substantially over time. Thus, forecast heterogeneity constitutes a potentially important source of economic fluctuations. While the particular reasons for diversity in professional forecasts are not observable, the diversity in model forecasts can be traced to different modeling assumptions, information sets and parameter estimates. JEL Classification: G14, G15, G2

Alternative Trading Systems and Liquidity.

A diversity of so-called Alternative Trading Systems (ATS) has challenged the existing traditional exchanges. This paper studies the impact of these ATS on the liquidity on the traditional financial markets using a market microstructure approach. In the United States ATS have been particularly successful in attracting trade in the Nasdaq dealer market, whereas they are less successful in competition with the NYSE. The theoretical reasoning behind this conjecture is that the agency nature of trading at the ATS allows investors to trade directly with each other without the intervention of a dealer. We argue that since continental European exchanges are typically organized as auction markets implying an agency nature of trading, the liquidity externality will prevent the auction-type ATS from breaking through and acquiring a significant market share in Europe. Only Crossing Networks may turn out to be more successful in realizing trades in Europe as they rely on the efficiency of price discovery on their primary market.