the volume clock insights into the high frequency paradigm execution strategies in equity markets

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1TheVolumeClock:InsightsintotheHigh-FrequencyParadigmDavidEasley;MarcosLópezdePrado;MaureenOHaraCornellUniversity;RCCatHarvardUniversity;CornellUniversityLegendhasitthatNathanMayerRothschildusedracingpigeonstofront-runhiscomp

2、etitorsandtradeonthenewsofNapoleonsdefeatatWaterlooafulldayaheadofHisMajestysofficialmessengers(GrayandAspey2004).Whetherthisstoryistrueornot,itisunques-tionablethattherehavealwaysbeenfastertraders.Leinweber(2009)relatesmanyinstancesinwhichtechnologicalbreak

3、throughshavebeenusedtomostinvestorsdisadvantage.Thetelegraphgaveanenormousedgetosomeinvestorsoverothersinthe1850s,per-hapstoagreaterextentthantheadvantagesenjoyedtodaybyhigh-frequencytraders.Thesamecouldbesaid,forexample,oftelephonetradersinthe1870s,radiotr

4、adersinthe1910s,screentradersinthe1980s.Sometradershavealwaysbeenmuchfasterthanothers,sowhatisnewthistimearound?Ifthereissomethingtrulynovelabouthigh-frequencytrading(HFT),itcannotonlybespeed.Andyet,high-frequencytradershavebeencharacterisedaschee-tahtrader

5、s,anuncomplimentaryallusiontotheirspeedandcharac-ter.Therealityis,asusual,morecomplex.Todayshigh-frequencymarketsarenottheoldlow-frequencymarketsonsteroids.Tobesure,speedisanimportantcomponentofhigh-frequencyssuccess.However,inthischapterweshallarguethatthe

6、reismuchmoretoit.WeshallmakethecasethatwhatliesattheheartofHFTisachangeinparadigm.1





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HIGH-FREQUENCYTRADINGTHENEWTRADINGPARADIGMTheUSflashcrashofMay6,2010,pushedHFTintothespotlight.Tounderstandwhatledtotheemergenceofhigh-freq

7、uencytrading,however,wehavetoturntheclockbackfiveyears.HFTstrategiesweremadepossiblebylegislativechangesintheUS(RegulationNationalMarketSystemlawof2005,knownasRegNMS)andEurope(theMarketsinFinancialInstrumentsDirective,orMiFID,inforcesinceNovember2007),preced

8、edbysubstantialtechnologi-caladvancesincomputationandcommunication.High-speedtrad-inghadbeentechnologicallypossibleformanyyears,butitwaslegislativeactionthatmadeHFTprofitable.MiFIDfosteredgreatercompeti