About Order Book Models

bbt80 said:
You guys are great! That's what I expected to hear from you as I didn't have the time to explain more about my “strategy”.

In the next days I'll clarify things, but, for now:
  • I am a student and this is just a theoretical work (but, as I said, I'll test it in the wild)
  • I'll not trade in the US (if I can compete everywhere in the world, why would I choose the hardest championship?)
  • I will not try to occupy the space of HFT and market makers, but I'm interested in modeling their behavior
  • From my perspective, the order book is like a cell in a tissue (down-top approach)
Mental exercise: Imagine big international banks and funds investing in some market (not the US) index and you can see their (the brokers) activity. Almost every single order. There're a couple of ETFs based on that index and some other related. The index is concentrated in a dozen stocks. There's futures and options markets based on that index. The big guys need to hedge their exposition to the exotic currency too. Everything is related. It's like an orchestra trying to keep up with the pace of a crazy conductor. They make a lot of small mistakes (almost imperceptible). But there're times they make big ones.

Some people coined the expression "guerrilla trading" sometime ago. I think it is aggressive. I'm not even a trader (let alone an opportunistic one). I'm just a guy with a bad taste for music. But let me just start with a simple order book model.
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Congrats, you're onto something. Too bad you're a student and you'll probably never get a shot at testing your hypothesis
 
Same Lazy Element said:
It's not hopeless as some posters stated, but it's not easy either.

The general idea is that you can't beat high frequency players because of technology costs, but you can participate in the game when they are not interested. So what you want is to provide liquidity at the holding horizons or imbalances that are beyond that of the traditional HFT players. Remember that these guys do not like taking on any meaningful risk, so any 2+ sigma events in liquidity will not be readily adsorbed.

There is some good and some bad to this business model. If you take meaningful risk (unlike true HFTs), your Sharpe ratios would still be much higher than the market though you're still going to have losing days/months. Also, pnl per trade value wouldn't be as tight as that for market makers, so you are less impacted by trading costs. The bad is that this approach usually requires a rare combination of the alpha skills (market knowledge, statistical methods etc), with technology acumen (ability to build systems that take advantage of these opportunities) all while operating in a rather capacity constrained way.
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it is hopeless and any retail who tries to compete with hft is just dumb. even if you learn something if you cant make money from it then what good is it in the financial markets. these are selfish mkts they help no one emotionally or with their health. there is no room left in the hft space.

THE FIRST THING THAT MUST BE DONE ON ANY TRUE PROPER STUDY OF HFT WOULD BE OF THE TRADE ENGINE AND ITS FILLING ALGOS IN THE MKT YOU ARE TRADING.

THEN THE SPEEDS OF THE TRADE ENGINE AND THE ELECTRONIC JITTER AND WHICH GATEWAYS TO USE. THEN YOU WOULD NEED TO LEARN ABOUT COLOCATION AND HOW MUCH SLOWER YOUR HARDWARE IS COMPARED TO YOUR COMPETITIONS

THEN YOU NEED TO DO THE SAME IN THE CASH MARKET OR ANY OTHER MARKETS OF THE SAME CONTRACT. LIKE SOYBEANS IN BRAZIL OR OTHER EXCHANGES THAT INCLUDE USA STOCKS AS ADRS. YOU MUST ALSO INCLUDE CURRENCY FKUCTUATIONS AND INTEREST RATES.

THIS IS ALL BEFORE EVEN STARTING TO LEARN HOW TO OR WHEN TO GET PRIORITY ON THE CLOB.

MANY HFT NOEMW ARE AGGRESSIVE AND ONLY TAKE LIQUIDITY.

THIS IS JUST THE START. IT TAKES 20 TO 50 MILLION A YEAR IN TECHNOLOGY UPGRADES AND TRUE DMA FEES N COLOCATION JUST TO SHOW UP AT THE RACE.
 
if you are so good at math then break down 1 second in time into milli micro nano pico and then equate it to days and show us how many weeks months years of time they have to calculate and cancel or add liquidity compared to even 1 or 2 mouse clicks.

even right now what is the conversion time of your trades from Mit to mkt. Or how long for a limit order to be risk checked. etc.

this is futile.
 
MrMuppet said:
Congrats, you're onto something. Too bad you're a student and you'll probably never get a shot at testing your hypothesis
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Certainly I will test it in practice (it's the most important section in a paper for me). I've traded using NinjaTrader, Thinkorswin, MT4, MT5, Tradestation, "TastyPlatform" (lol) and a dozen more outside the US. Now I know just what I need and I'll probably use some nice open source code base, like QuantLib, and maybe I will hire programmers to help me in boring parts, like routing protocols.
 
bbt80 said:
I'll probably use some nice open source code base, like QuantLib, and maybe I will hire programmers to help me in boring parts, like routing protocols.
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Well, at least you are starting with SOMETHING. When Jim Simons https://en.wikipedia.org/wiki/Jim_Simons_(mathematician) of Renaissance fame started building automated trading models, they had nothing and ended up writing over a million lines of C++ code.
Keep in mind that you are tackling an enormous project of building a customized trading platform.

I, for one, am a user of Multicharts which is written in C++ and is very efficient. In fact I know of one HFT firm that uses it successfully in a co-located server environment. Instead of a million lines of code, their trading model was written in a couple hundred lines of Powerlanguage.
 
syswizard said:
Keep in mind that you are tackling an enormous project of building a customized trading platform.
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Unfortunately, there're just a few (retail) trading platforms where I live. It's a shame. Firms try to "import" platforms like NinjaTrader, MT5 etc, but they fail to integrate them properly (stability issues) with the local infrastructure. But I see that as an opportunity. If I have the chance, maybe I'll try a more robust solution (=spend more money).
 
ajacobson said:
There is a guy at AQR who was the Wall Street jock on this stuff and has extensively published his work - Kukanov. May still be around, but search is work.
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Dude - this may possibly be one of the most incoherent posts this year in ET. Do you want to clean this up ?
How about some links ? Who's AQR ? Who's Kukanov ?
 
ajacobson said:
There is a guy at AQR who was the Wall Street jock on this stuff and has extensively published his work - Kukanov. May still be around, but search is work.
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This is gold! His PhD thesis is the kind of work I'm looking for. The subscription fee of this forum is finally paying off! :)
 
syswizard said:
Dude - this may possibly be one of the most incoherent posts this year in ET. Do you want to clean this up ?
How about some links ? Who's AQR ? Who's Kukanov ?
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Phew... I always think I'm missing something... some slang, something I should know. I had to google everything.
 
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