《Low-Frequency Traders in a High-Frequency World--- A Survival Guide》.pdf

Low-Frequency Traders in a High-Frequency world: A Survival Guide Marcos L贸pez de Prado Hess Energy Trading Company Lawrence Berkeley National Laboratory Electronic copy available at: /abstract=2150876 Key Points 鈥 Multiple empirical studies have shown that Order Flow Imbalance has explanatory power over the trading range. 鈥 The PIN Theory (Easley et al. [1996]) reveals the Microstructure mechanism by which 鈥 Market Makers adjust their trading range to avoid being adversely selected by Informed Traders. 鈥 Informed Traders reveal their future trading intentions when they alter the Order Flow. 鈥 Consequently, Market Makers鈥 trading range is a function of the Order Flow imbalance. 鈥 VPIN is a High Frequency estimate of PIN, which can be used to detect the presence of Informed Traders. 2 Electronic copy available at: /abstract=2150876 SECTION I The great divide Electronic copy available at: /abstract=2150876 Is speed the real issue? 鈥 Faster traders are nothing new: 鈥 Nathan Rothschild is said to have used racing pigeons to trade in advance on the news of Napoleon鈥檚 defeat at Waterloo. 鈥 Beginning in 1850s, only a limited number of investors had access to telegraphy. 鈥 The telephone (1875), radio (1915), and more recently screen trading (1986) offered speed advantages to some participants over others. 鈥 Leinweber [2009] relates many instances in which technological breakthroughs have been used to most investors鈥 disadvantage. So 鈥 what is new this time?