Quote from HFStartup:
Investopedia defines Scalability as:
"A characteristic of a system, model or function that describes its capability to cope and perform under an increased or expanding workload. A system that scales well will be able to maintain or even increase its level of performance or efficiency when tested by larger operational demands."
This may be a basic question to some, but is there an industry standard for calculating scalability for a trading system? If so, how is it done and does the methodology change across financial instruments (equities, derivatives, bonds, futures, currencies, etc.)?
Thanks.
The industry operates with the asumptions at the standard Bone mentioned.
For this reason the industry perfoms relatively poorly as compared to the market's offer.
You can easily get the correct answer by doing a running tabulation that gives you the market's "capacity" (its coping ability) at ant particular time.
What happens most in markets is adding and pulling orders so the book alone is just humor.
T&S, on the other hand is limited to the orders that do get filled where one side is a Market type trade and the other is a book type trade.
To narrow the opportunity to a place really close to reality, there is one other consideration that the financial industry screws up. The book holds additional info that is really helpful but indirect in terms of availability.
What the financial industry does mostly is get left at the alter. Orders place go unfilled and the market moves "against" the unfilled orders. worse still is the nature of a thing called "whipsaw", a term used to describe failing the accomplishment of a required trading goal.
To prevent this form of loss, another kind of mistake is made and it is called the "early exit". What happens in terms of "coping" is that a lot of player money is always sidelined and not available to face.
So as Bone says, the formulas used have very little value to him and his ilk.
To include all these variables is easy; the capacity of the market (its coping ability) can be measured by the trading velocity divided by a number that assures you no slippage in the partial fills of orders. Stops cannot be part of this since they do not work for any account of any size. Discontinuing the use of stops is part of the trader's growth process. You can read almost any post and determine if the person is still depending on stops instead of skills and knowledge.
The no slippage calculation also depends on the market's harmonic orientation (odd or even).
To include the harmonics you use a spacing strategy that still yields no slippage and completing correcting the side of the market to be on.
A strategy for making money can be deployed that is a multiple of the Wikipedia level of thinking. (It is also very superior to the current flavor of the month HFT) A good comparison is one shot one kill (sniper's do this) to the use of an AK47 or a mortar. Heavier packs are required in the field.
The ultimate measure of success is money velocity for capital available.
You run at bursts to have no slippage AND you do partial fills using a stacatto of shots that occupy the whole window for the turn.
