Handbook of High Frequency Trading

The Handbook of High Frequency Trading

Greg N. Gregoriou

State University of New York (Plattsburgh)

Table of Contents

Cover image

Title page

Copyright

List of Contributors

Contributors Biographies

Editor Biography

Acknowledgments

Introduction

Part 1. Trading Activity

Chapter 1. High-Frequency Activity on NASDAQ

1.1. Introduction

1.2. Data

1.3. Results

1.4. Conclusion

Chapter 2. The Profitability of High-Frequency Trading: Is It for Real?

2.1. Introduction

2.2. Definition and Characteristics of HFT

2.3. What Constitutes HFT?

2.4. The Profitability of HFT

2.5. Profitability as a Function of the Holding Period

2.6. Methodology

2.7. Data and Empirical Results

2.8. Conclusion

Chapter 3. Data Characteristics for High-Frequency Trading Systems

3.1. Introduction

3.2. Literature Review

3.3. Methodology

3.4. Analysis of Data

3.5. Conclusion

Chapter 4. The Relevance of Heteroskedasticity and Structural Breaks when Testing for a Random Walk with High-Frequency Financial Data: Evidence from ASEAN Stock Markets

4.1. Introduction

4.2. Method

4.3. Data

4.4. Results

4.5. Discussion

4.6. Conclusion

Chapter 5. Game Theoretical Aspects of Colocation in High-Speed Financial Markets

5.1. Introduction

5.2. Literature and Structure of the Chapter

5.3. Colocation and Latency Reduction

5.4. Empirical Evidence: Technical Arbitrage through Latency Reduction

5.5. Modeling Strategic Choices on Colocation

5.6. Discussion: Evolutionary Optimization and Spatial Dynamics

5.7. Conclusion, Limitations, and Implications for Money Managers

Chapter 6. Describing and Regulating High-Frequency Trading: A European Perspective

6.1. Introduction

6.2. HFT Description and Drivers

6.3. High Frequency Trading versus Algorithmic Trading

6.4. Strategies of HFT

6.5. Characteristics of AT and HFT

6.6. About the Concept of Liquidity

6.7. HFT and Flash Crashes

6.8. MiFID II and HFT Regulation in the EU

Part 2. Evolution and the Future

Chapter 7. High-Frequency Trading: Implications for Market Efficiency and Fairness

7.1. Introduction

7.2. Nature of HFT and Recent Trends

7.3. Some Salient Issues Related to HFT

7.4. HFT and Fairness

7.5. Concluding Remarks

Chapter 8. Revisioning Revisionism: A Glance at HFT's Critics

8.1. Introduction: High-Frequency Trading Under Siege

8.2. The Lewis Debate in Context

8.3. An HFT Tableau: Perception versus Reality

8.4. Conclusion

Chapter 9. High-Frequency Trading: Past, Present, and Future

9.1. Introduction

9.2. The Origins of HFT

9.3. HFT Today

9.4. HFT Going Forward

9.5. Hedge Funds

9.6. Conclusion

Chapter 10. High-Frequency Trading and Its Regulation in the Australian Equity Markets

10.1. Introduction

10.2. Regulatory Response

10.3. Conclusion

Chapter 11. Global Exchanges in the HFT Nexus

11.1. Introduction

11.2. The Nexus of an Exchange

11.3. Exchanges and Their Customers

11.4. Regulators and Exchanges

11.5. Conclusion

Part 3. Liquidity and Execution

Chapter 12. Liquidity: Systematic Liquidity, Commonality, and High-Frequency Trading

12.1. Introduction

12.2. High-Frequency Trading and Liquidity

12.3. An Empirical Study of Equity Market Liquidity

12.4. Data

12.5. Statistical Results

12.6. Concluding Thoughts

Chapter 13. We Missed It Again! Why Do So Many Market Orders in High-Frequency FX Trading Fail to be Executed?

13.1. Introduction

13.2. The Structure of the EBS FX Market

13.3. Aggressive IOC Orders

13.4. Conclusion

Chapter 14. Efficient Performance Evaluation for High-Frequency Traders

14.1. Introduction

14.2. The Model

14.3. Conclusion

Part 4. Impact of News Releases

Chapter 15. Do High Frequency Traders Care about Earnings Announcements? An Analysis of Trading Activity before, during, and after Regular Trading Hours

15.1. Introduction

15.2. High Frequency Trading

15.3. Related Literature

15.4. Data

15.5. Results

15.6. Conclusion

Chapter 16. Why Accountants Should Care about High Frequency Trading

16.1. Introduction

16.2. Internal controls and tone at the top

16.3. Conclusion

Chapter 17. High-Frequency Trading under Information Regimes

17.1. Introduction

17.2. Data

17.3. Methodology and Results

17.4. High-Frequency Trading Strategies

17.5. Conclusion

Chapter 18. Effects of Firm-Specific Public Announcements on Market Dynamics: Implications for High-Frequency Traders

18.1. Introduction

18.2. Data and Methodology

18.3. Empirical Results

18.4. Implications for HFT

18.5. Conclusion

Chapter 19. Machine News and Volatility: The Dow Jones Industrial Average and the TRNA Real-Time High-Frequency Sentiment Series

19.1. Introduction

19.2. Research Methods and Data

19.3. The Significance of the Sentiment Scores in the GARCH Analysis of DJIA Return Series

19.4. Conclusion

Part 5. Impact of Volatility

Chapter 20. High-Frequency Technical Trading: Insights for Practitioners

20.1. Introduction

20.2. The Trading Rule Methodology

20.3. Data

20.4. Results

20.5. Conclusion

Chapter 21. High-Frequency News Flow and States of Asset Volatility

21.1. Introduction

21.2. Data and Sample

21.3. Data and Sample

21.4. Methodology and Model Specification

21.5. Empirical Results and Implications

21.6. Conclusion and Implications

Appendix A: Dow Jones Composite Average 65 Stocks

Appendix B: RavenPack Algorithms

Chapter 22. News Releases and Stock Market Volatility: Intraday Evidence from Borsa Istanbul

22.1. Introduction

22.2. Model Specification and Data

22.3. Results and Discussion

22.3. Conclusion

Chapter 23. The Low-Risk Anomaly Revisited on High-Frequency Data

23.1. Introduction

23.2. Literature Review

23.3. Methodology

23.4. Investment Universe and Data Collection

23.5. Findings

23.6. Conclusion

Appendix 1

Appendix 2

Chapter 24. Measuring the Leverage Effect in a High-Frequency Trading Framework

24.1. Introduction

24.2. Model Setting

24.3. Computation of Leverage Using Fourier Methodology

24.4. Numerical Results

24.5. Conclusion

Index

Copyright

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Notices

Knowledge and best practice in this field are constantly changing. As new research and experience broaden our understanding, changes in research methods, professional practices, or medical treatment may become necessary.

Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility.

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List of Contributors

Erdinç Akyıldırım,     Akdeniz University, Faculty of Economics and Administrative Sciences, Antalya, Turkey

Paul U. Ali,     Melbourne Law School, Parkville, Melbourne, VIC, Australia

David E. Allen,     School of Mathematics and Statistics, University of Sydney, and School of Business, University of South Australia, Australia

Albert Altarovici,     ETH Zürich, Department of Mathematics, Zürich, Switzerland

Richard G. Anderson,     School of Business and Entrepreneurship, Lindenwood University, St Charles, MO, USA

Jane M. Binner,     Department of Accounting and Finance, Birmingham Business School, University of Birmingham, Birmingham, UK

Kris Boudt,     Solvay Business School, Vrije Universiteit Brussel, Brussels, Belgium

Godfrey Charles-Cadogan,     School of Economics, UCT, Rondebosch, Cape Town, South Africa

Giuseppe Ciallella,     Law and Economics, LUISS Guido Carli, Rome, Italy

Brittany Cole,     University of Mississippi, School of Business, University, MS, USA

Imma Valentina Curato,     Ulm University, Ulm, Germany

Jonathan Daigle,     University of Mississippi, School of Business, University, MS, USA

Nazmi Demir,     Department of Banking & Finance, Bilkent University, Bilkent, Ankara, Turkey

Cumhur Ekinci,     ITU Isletme Fakultesi - Macka, Istanbul, Turkey

Dov Fischer,     Brooklyn College, School of Business, Brooklyn, NY, USA

Nikola Gradojevic,     Lille Catholic University, IÉSEG School of Management, Lille, France

Greg N. Gregoriou,     State University of New York (Plattsburgh), NY, USA

George Guernsey,     Managing Partner, Insight Mapping, St. Louis, MO, USA

Björn Hagströmer,     School of Business, Stockholm University, Stockholm, Sweden

Tobias Hahn,     Bond University, Gold Coast, QLD, Australia

Kin-Yip Ho,     Research School of Finance, Actuarial Studies and Applied Statistics, ANU College of Business and Economics, The Australian National University, Canberra, ACT, Australia

Hooi Hooi Lean,     Economics Program, School of Social Sciences, Universiti Sains Malaysia, Penang, Malaysia

Camillo Lento,     Faculty of Business Administration, Lakehead University, Thunder Bay, ON, Canada

François-Serge Lhabitant,     CEO and CIO, Kedge Capital, Jersey; EDHEC Business School, Nice, France

Jeffrey G. MacIntosh,     University of Toronto, Faculty of Law, Toronto, ON, Canada

Michael J. McAleer,     Department of Quantitative Finance, College of Technology Management, National Tsing Hua University, Hsinchu, Taiwan, and Econometric Institute, Erasmus School of Economics, Erasmus University, Rotterdam, The Netherlands

David R. Meyer,     Olin Business School, Washington University in St. Louis, St. Louis, MO, USA

Vinod Mishra,     Department of Economics, Monash University – Berwick Campus, Berwick, VIC, Australia

Imad Moosa,     School of Economics, Finance and Marketing, RMIT, Melbourne, VIC, Australia

Giang Nguyen,     Solvay Business School, Vrije Universiteit Brussel, Brussels, Belgium

Birger Nilsson,     Department of Economics, Lund University, Sweden

Benedict Peeters,     Finvex Group, Brussels, Belgium

Vikash Ramiah,     School of Economics, Finance and Marketing, RMIT, Melbourne, VIC, Australia

Erick Rengifo,     Fordham University, Bronx, NY, USA

Simona Sanfelici,     Department of Economics, University of Parma, Parma, Italy

Martin Scholtus,     Econometric Institute and Tinbergen Institute, Erasmus University Rotterdam, Rotterdam, The Netherlands

Tayyeb Shabbir,     Department of Finance, CBAPP, California State University Dominguez Hills, Carson, CA, USA and Department of Finance, Wharton School, University of Pennsylvania, Philadelphia, PA, USA

Yanlin Shi,     Research School of Finance, Actuarial Studies and Applied Statistics, ANU College of Business and Economics, The Australian National University, Canberra, ACT, Australia

Abhay K. Singh,     School of Business, Edith Cowan University, Joondalup, WA, Australia

Russell Smyth,     Department of Economics, Monash University, Clayton, VIC, Australia

M. Nihat Solakoglu,     Department of Banking & Finance, Bilkent University, Bilkent, Ankara, Turkey

Masayuki Susai,     Nagasaki University, Nagasaki, Japan

Rossen Trendafilov,     Department of Economics, Truman State University, Kirksville, MO, USA

Dick van Dijk,     Econometric Institute and Tinbergen Institute, Erasmus University Rotterdam, Rotterdam, The Netherlands

Bonnie F. Van Ness,     University of Mississippi, School of Business, University, MS, USA

Robert A. Van Ness,     University of Mississippi, School of Business, University, MS, USA

Bruce Vanstone,     Bond University, Gold Coast, QLD, Australia

Camillo von Müller,     CLVS-HSG University of St. Gallen, St. Gallen, Switzerland

Yushi Yoshida,     Shiga University, Hikone, Japan

Zhaoyong Zhang,     School of Business, Faculty of Business and Law, Edith Cowan University, Joondalup, WA, Australia

Contributors Biographies

Erdinç Akyıldırım is a researcher and product developer at Borsa Istanbul. Prior to Borsa Istanbul, he worked as a quantitative analyst and derivatives portfolio manager at Industrial Development Bank of Turkey and as a research and teaching assistant at Bogazici University, Sabanci University, and Swiss Federal Institute of Technology in Zurich. He received a BSc degree in mathematics and MSc degree in financial engineering from Bogazici University. He completed his PhD in banking and finance at University of Zurich and Swiss Finance Institute in 2013. During his PhD, he worked on topics related to financial engineering, financial mathematics, and financial econometrics and has published several papers in international journals and conferences.

Paul U. Ali is Associate Professor at Melbourne University Law School and a member of the Law School's Centre for Corporate Law and Securities Regulation. Paul has published widely on banking and finance law. Paul has worked in the banking and finance and corporate groups of two leading Australian law firms. He has also worked in the securitization team of a bank, and has been a principal of a private capital firm and a consultant with a corporate governance advisory firm.

David E. Allen has a PhD in finance from the University of Western Australia, plus an MPhil in economics from the University of Leicester. In the course of the last 39  years, he has been employed by De Montfort University and the University of Edinburgh in the UK, and the University of Western Australia, Curtin University, and Edith Cowan University in Western Australia where he was Foundation Professor of Finance. He is currently Visiting Professor in the School of Mathematics and Statistics at the University of Sydney and Adjunct Professor at the University of South Australia. He has published 3 books and over 100 other contributions to books and refereed journal publications.

Albert Altarovici is a PhD student in mathematics at ETH Zurich. He specializes in stochastic optimal control and its applications to finance. In a recent paper with J. Muhle-Karbe and H.M. Soner, he studies the asymptotic expansion for the problem of optimal consumption and investment in a market with multiple risky assets, which are correlated Brownian motions and a money market paying constant interest rate where every transaction incurs a fixed transaction cost. He has taught mathematics and finance at the University of Virginia and ETH Zurich.

Richard Anderson is senior research fellow, Center for Economics and the Environment, and Adjunct Professor, School of Business and Entrepreneurship, Lindenwood University, St Charles, Missouri. Previously, he was vice president and economist, Federal Reserve Bank of St Louis, and economist, Board of Governors of the Federal Reserve System, Washington, D.C. Prior to joining the Federal Reserve, he taught at Michigan State University, Ohio State University, and the University of Michigan. He holds a PhD from MIT and a BA in economics from the University of Minnesota. His research focuses on empirical macroeconomics and monetary policy.

Jane M. Binner is Chair of finance, accounting and finance department, Birmingham Business School, Birmingham University, UK. Previously, she was Head of the Accounting and Finance Division at Sheffield Management School, Sheffield, UK and Reader in economics, Aston Business School, Birmingham, UK. She holds PhD, MSc, PGCE, and BA Hons in economics from the University of Leeds. Her research focuses on econometric modeling of financial markets, including asset prices and monetary aggregates.

Kris Boudt is Associate Professor in finance at Vrije Universiteit Brussel and part-time at the econometrics and finance department of the VU University of Amsterdam. He is a research partner of Finvex Group and affiliated researcher at KU Leuven. By training he has an MSc degree in economics from the University of Namur and a PhD from the KU Leuven (2008). Previously, he was Assistant Professor at the KU Leuven (2009–2012) and Guest Lecturer at the University of Illinois at Chicago. The research of Kris Boudt aims at developing econometric methodology for analyzing financial markets and optimizing portfolio risk. He has published in leading international finance and statistics journals including the International Journal of Forecasting, Journal of Empirical Finance, Journal of Financial Econometrics, Journal of Financial Markets, Journal of Risk, and Statistics and Computing, among others. Kris Boudt is in the editorial board of quantitative finance letters and is a coauthor of the high-frequency and PortfolioAnalytics packages.

Godfrey Charles-Cadogan is a Research Scientist in risk and uncertainty at the Institute for Innovation and Technology Management (IITM), Ted Rogers School of Management, Ryerson University. His work has been featured in Financial Research Letters, System Research and Behavioural Science, Proceedings of the American Statistical Association Business & Economics Section, Proceedings of Foundations and Applications of Utility, Risk and Decision Theory, Money Science, All About Alpha, and High Frequency Trading Review. He is the creator of the Cadogan stock price formula for high-frequency trading, and criterion function for predicting market crash from the probability weighting function implied by index option prices. His research interests are behavioral stochastic processes, financial economics, experimental economics, and decision theory. He holds Bachelor of Science degrees in statistics and actuarial mathematics as well as a Master of Science degree in mathematical statistics from the University of Michigan, and is a PhD candidate in economics at the University of Cape Town in Mathematical Behavioral Economics.

Giuseppe Ciallella graduated with honors at LUISS Guido Carli (Rome) Law School in 2009 and then spent one year as research assistant in Company Law and Securities Regulation at the same university. In 2012, he got an LL.M. from the London School of Economics and Political Science on a Donato Menichella Scholarship by the Bank of Italy. His PhD at LUISS Guido Carli is in Law and Economics and his field of research is Banking and Financial Regulation. During his PhD he also worked at Goldman Sachs International, Milan, and at Cleary Gottlieb Steen and Hamilton LLP, Rome.

Brittany Cole is a fifth year finance PhD student at the University of Mississippi. She received a bachelors degree in agriculture economics from the University of Tennessee at Martin and an MBA from the University of Mississippi. Brittany's research interests include corporate and municipal bond trading, information transmission, and market microstructure.

Imma Valentina Curato holds a PhD in mathematics for economic decisions from the University of Pisa, Italy. Currently, she is a Postdoc student at the Institute of Mathematical Finance, Ulm University, Germany, and an external consultant at the European Central Bank, Frankfurt, Germany. Her main research interests are in the field of nonparametric econometrics: estimation of volatility; of leverage processes in univariate and multivariate frameworks, high-frequency data analysis, calibration/forecast performance of multifactor stochastic volatility models; and of liquidity risk factors models.

Jonathan Daigle is a fourth year finance PhD student at the University of Mississippi. He received his undergraduate degree and MBA from the University of South Alabama. His research interests include private equity, IPOs, and acquisitions.

Nazmi Demir received his MSc and PhD from the University of California, Davis in agricultural economics in 1970 and his associate professorship in economic policy in Turkey, in 2000. Nazmi specialized in Leontief input–output, inefficiency models, and environments in agricultural economics. He was a board member of various international research centers for 18  years. After a long-term government employment at high positions in various departments such as development planning, agrarian reform, and administrative duties in Turkey he joined Bilkent University in the Department of Economics as an instructor first and then as a chairman of the banking and finance department teaching micro- and macroeconomics, statistics, banking, and finance. He has published numerous books and papers in Developing Economies, Economic Letters, Canadian Journal of Agricultural Economics, and Economic Systems Research.

Cumhur Ekinci is Assistant Professor of finance at Istanbul Technical University (ITU). He studied economics and finance at Bogazici, Paris I Pantheon-Sorbonne and Aix-Marseille III. Dr Ekinci established and worked in a trading room at CNAM in Paris. He has been teaching financial markets, investment, corporate finance and accounting at ITU, CNAM, Aix-Marseille, and ENPC. His research includes topics in market microstructure, behavioral finance, and risk measurement.

Dov Fischer is Assistant Professor of accounting at Brooklyn College. He holds a doctorate in accounting from University of Colorado at Boulder, and is a CPA in New York State. He researches financial reporting in the banking and pharmaceutical industries, financial derivatives, accounting ethics, International Financial Reporting Standards (IFRS), and accounting education. His research has been recognized and awarded by the American Accounting Association, and he regularly publishes in academic and practitioner journals, including CPA Journal; Journal of Business & Economic Studies; Journal of Accounting, Ethics, and Public Policy; and Journal of Religion & Business Ethics.

Nikola Gradojevic received the PhD degree in financial economics from the University of British Columbia, Vancouver, BC, Canada, in 2003. He also holds an MA in economics from University of Essex and Central European University and an MSc in electrical engineering (System Control Major). Currently, he is Associate Professor of finance at the IÉSEG School of Management, Lille Catholic University, in Lille and Paris, France. During his career, he took positions at the University of British Columbia, Bank of Canada, Federal Reserve Bank of St Louis, Lakehead University, and in the private sector as a consultant in the financial and mining industries. He has held visiting appointments at Rouen Business School in France, University of Bologna in Italy, Faculty of Economics in Montenegro and University of Novi Sad, Faculty of Technical Sciences. He is currently a research fellow at the Rimini Center for Economic Analysis in Italy and Visiting Professor at the University of Essex (The Centre for Computational Finance and Economic Agents) in the United Kingdom. Dr Gradojevic's research interests include empirical asset pricing, market microstructure, high-frequency finance, international finance, nonadditive entropy, artificial intelligence (e.g., neural networks and fuzzy logic), technical trading, asset price volatility and bubbles. He has published his research in journals, such as Journal of Banking and Finance, Journal of Empirical Finance, Quantitative Finance, Journal of Economic Dynamics and Control, Finance Research Letters, IEEE Signal Processing Magazine, IEEE Transactions on Neural Networks, Physica D, and Journal of Forecasting.

George Guernsey is Managing Partner of Insight Mapping. He served as group head of strategy, risk and financial reporting at two international banks and two global consulting firms, providing growth strategies to banks and exchanges. Based in London for 17  years, he then developed risk products and strategies for banks and technology companies in Europe and Asia. He cofounded Strategic Insights, a competitive intelligence resource, then launching and directing its Insight Mapping market radar service. Insight Mapping employs customized versions of systems developed for government intelligence services to target emerging threats and opportunities for companies and financial institutions. Early identification provides a competitive advantage for executives seeking to spot needs, design new products and services, mitigate risks, and go to market effectively. He has a BA in political science and economics from Yale University and an MBA with distinction from the Wharton School of the University of Pennsylvania.

Björn Hagströmer is Associate Professor, Stockholm Business School, Stockholm University, Sweden. He holds a PhD from Aston Business School, Birmingham, UK. His research focuses on empirical asset pricing and empirical market microstructure, including high-frequency trading.

Tobias Hahn holds a PhD in computational finance from Bond University. His PhD thesis investigated the application of machine learning to options pricing. He is an active academic researcher, and has practical experience in financial analysis and trading systems development. Tobias's current research interests focus on the modeling of high-frequency financial time series, asset pricing, and model evaluation.

Kin-Yip Ho is currently Assistant Professor at the Research School of Finance, Actuarial Studies and Applied Statistics in The Australian National University. He has held visiting positions, including a fellowship from the Korea Institute of International Economic Policy (KIEP) to work on a research project involving the Chinese financial markets. He has published articles in various international journals, such as Annals of Actuarial Science, Annals of Financial Economics, China Economic Review, Economie Internationale, Japan and the World Economy, Journal of Applied Econometrics, Journal of Economic Development, Journal of Wealth Management, Mathematics and Computers in Simulation, North American Journal of Economics and Finance, Review of Financial Economics, and World Economy. He has also published several book chapters on Asian financial markets in the Handbook of Asian Finance. His current research interests lie in the actuarial applications of financial and statistical models, financial econometrics, international finance, and time series analysis. He graduated with a PhD in economics from Cornell University and has an Associate Diploma in Piano Performance from London College of Music.

Hooi Hooi Lean is Associate Professor at the School of Social Sciences (economics program), Universiti Sains Malaysia. She has published more than 80 book chapters and journal articles in many reputed international journals. Dr Lean is listed in the Who's Who in the World 2009 and Researcher of the Week in GDNet East Asia. She was awarded the ASEAN-ROK Academic Exchange Fellowship Program in 2007, the Democratic Pacific Union Visiting Fellowship in 2008, and the International HERMES Fellowship Program in 2009. Dr Lean also won the Sanggar Sanjung Excellence Award for Publication, since 2009 and the Hadiah Sanjungan Award for Best Publication, since 2006. There are 1132 citations to her research on Google Scholar.

Camillo Lento is Associate Professor of accounting in the Faculty of Business Administration at Lakehead University. He received his PhD from the University of Southern Queensland, and both his masters (MSc) degree and undergraduate degree (HBComm) from Lakehead University. He is a Chartered Accountant (Ontario), Certified Fraud Examiner, and Chartered Business Valuator. Dr Lento has published numerous articles and book chapters on technical trading models and capital markets. In addition, he is the lead author of the financial accounting casebook entitled Cases in Financial Accounting. Dr Lento is also Contributing Editor for Canadian MoneySaver magazine and has authored numerous articles on personal tax planning matters. His tax planning articles have also been featured in many national media outlets. Dr Lento teaches various financial accounting and auditing courses, including contemporary issues in accounting theory, advanced topics in accounting, intermediate accounting, and introductory accounting. Dr Lento continues to practice in the area of accounting, business valuation, and economic loss quantification.

François-Serge Lhabitant is currently the CEO and CIO of Kedge Capital, where he oversees more than $6 billion of capital invested in hedge funds and risk-controlled strategies. He was formerly a member of senior management at Union Bancaire Privie, where he was in charge of quantitative risk management and subsequently, of the quantitative analysis for alternative portfolios. Prior to this, François-Serge was Director at UBS/Global Asset Management, in charge of building quantitative models for portfolio management and hedge funds. On the academic side, François-Serge is currently Professor of finance at the EDHEC Business School (France) and Visiting Professor at the Hong Kong University of Science and Technology. François holds an engineering degree from the Swiss Federal Institute of Technology, a BSc in economics, an MSc in banking and finance, and a PhD in finance from the University of Lausanne.

Jeffrey MacIntosh is the Toronto Stock Exchange Chair of Capital Markets at the Faculty of Law, University of Toronto, and is a past Associate Director and Director of the Capital Markets Institute at the University of Toronto. He specializes in corporation law and finance, securities regulation, venture capital financing, and innovation. He holds law degrees from Harvard and Toronto, and a Bachelor of Science degree from MIT. Professor MacIntosh was appointed a John M. Olin Fellow in law and economics at Yale Law School in 1988–1989. He also served as a member of the Ontario Securities Commission Task Force on small business financing. Professor MacIntosh is the coauthor (with Chris Nicholls) of Essentials of Securities Regulation (Toronto: Irwin Law Inc., 2002) and has published numerous articles, book chapters, and commentaries on various topics in his areas of expertise.

Michael J. McAleer holds a PhD in economics from Queen's University, Canada. He is Chair Professor of quantitative finance, National Tsing Hua University, Taiwan; Professor of quantitative finance, Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands; Distinguished Professor, College of Management, National Chung Hsing University, Taiwan; Adjunct Professor, Department of Economics and Finance and Department of Mathematics and Statistics at the University of Canterbury, New Zealand; and Adjunct Professor, Faculty of Economics and Business, Complutense University of Madrid (founded 1293), Spain. He has published more than 600 journal articles and books in econometrics, economics, statistics, finance, risk management, applied mathematics, intellectual property, environmental modeling, and related disciplines. He is presently a member of the editorial boards of 26 international journals, and serves on several as Editor in Chief or Associate Editor in Chief.

David R. Meyer is Senior Lecturer in management at Olin Business School, Washington University in St Louis, teaching international business. Previously, he was Professor of sociology and urban studies at Brown University. His PhD is from the University of Chicago. Meyer's current research examines financial networks, Asian economic development, global business centers, and Asian business networks. Publications include 5 books and monographs and over 50 articles and book chapters. His book, Hong Kong as a Global Metropolis (Cambridge University Press, 2000), interpreted that city as the pivot of Asian business networks. The research on network behavior of leading international financiers was funded by the National Science Foundation.

Vinod Mishra is Senior Lecturer in the Department of Economics at Monash University, Australia. He has published more than 40 papers in leading international journals in economics, finance, and related areas. His research interests include applied industrial organization, financial economics, high-frequency financial data analysis, labour economics, development economics, and energy economics. He is particularly interested in studying various aspects of the emerging economies of India and China. There are more than 500 citations to his research on Google Scholar.

Imad Moosa is Professor of finance at RMIT, Melbourne. He has also held positions at Monash University (Melbourne), La Trobe University (Melbourne), and the University of Sheffield (UK). He holds a BA in economics and business studies, MA in the economics of financial intermediaries, and a PhD in financial economics from the University of Sheffield (UK). He has received formal training in model building, exchange rate forecasting, and risk management at the Claremont Economics Institute (United States), Wharton Econometrics (United States), and the Center for Monetary and Banking Studies (Switzerland). Before turning to academia in 1991, he worked as a financial analyst, a financial journalist, and an investment banker for over 10  years. He has also worked at the International Monetary Fund in Washington D.C. and acted as an advisor to the U.S. Treasury. Imad's work encompasses the areas of International Finance, Banking, Risk Management, Macroeconomics, and Applied Econometrics. His papers have appeared in the Journal of Applied Econometrics, Canadian Journal of Economics, IMF Staff Papers, Journal of Futures Markets, Quantitative Finance, Southern Economic Journal, American Journal of Agricultural Economics, Journal of Development Economics, Journal of Comparative Economics, Journal of Economic Organization and Behavior, and Journal of Banking and Finance. He has also written for the prestigious Euromoney Magazine. His recent books include Quantification of Operational Risk under Basel II: The Good, Bad and Ugly, The Myth of Too Big to Fail (both published by Palgrave in 2008 and 2009, respectively) and The US-China Trade Dispute: Facts, Figure and Myths, published by Edward Elgar, in 2012. His recent book, Quantitative Easing as a Highway to Hyperinflation has been published by World Scientific.

Giang Nguyen is Doctiris fellow at Finvex Group and Vrije Universiteit Brussel. He was previously responsible for risk management at several major Vietnamese financial institutions (Cement Finance Company and Vietnam bank for Industry and Trade) and worked on the R package highfrequency as a student in the Google Summer of Code project in 2013. He has a bachelor in economics from the National Economics University in Hanoi (Vietnam) and an MBA from the HU Brussels (Belgium). Giang Nguyen is currently a doctoral student at Vrije Unviersiteit Brussel and Finvex Group working on the development of Risk Optimized Portfolio Strategies, with a focus on intraday data, risk factors, and higher order comoments.

Birger Nilsson is Associate Professor, Department of Economics and Knut Wicksell Centre for Financial Research, School of Economics and Management, Lund University, Sweden. He holds a PhD from Lund University. His research focuses on empirical financial economics, including mathematical and statistical methods.

Benedict Peeters is founding partner and CEO of Finvex Group. Finvex Group combines academic research with advanced proprietary technology to analyze all types of financial risks with the aim of adding stability to overall investment portfolios. Its solutions include structured products, funds, and indices. Benedict has gained vast experience in asset management and investment banking in senior positions at BNP Paribas (Global Head of Structured Business, Sales & Investment Division), Morgan Stanley (Managing Director, Head of Structured Products Europe and MENA), and Deutsche Bank (Managing Director, Global Head Fund and Securitization Solutions, Equity Structuring, Global Markets Equities). Benedict publishes frequently in the specialized practitioner-oriented press.

Vikash Ramiah is Associate Professor of finance at RMIT University. He has a Diploma of Management, BSc (Hons) economics, Master of Finance program, and Doctor of Philosophy from RMIT University. He has received numerous awards for outstanding performance in teaching, research, and supervision. Vikash has been teaching economics and finance courses at RMIT, University of Melbourne, La Trobe University, and Australian Catholic University, since 1999. He has published in academic journals (e.g., Journal of Banking and Finance, Journal of Behavioral Finance, European Journal of Finance, Applied Economics, Pacific Basin Finance Journal, and Journal of International Financial Market, Institution and Money), industry reports, one book, book chapters, and over 35 conference papers. Vikash supervises numerous PhD students and regularly attracts research funding. He is an expert reviewer for 13 finance journals and for the Mauritius Research Council. He serves on the editorial board of two finance journals. He was an elected board member of the RMIT University Business Board, Program Director of Open Universities Australia and Acting Board member at the Australian Centre for Financial Studies. He was as a junior auditor at H&A Consultant, manager at Intergate PTY Limited, quantitative analyst at ANZ, Investment Banking Division, provided consultancy services to the Australian Stock Exchange and worked in collaboration with the Finance and Treasury Association of Australia and the Australian Centre for Financial Studies. He is the founder of Researchers Sans Frontiere Network and his research areas are financial markets, behavioral finance, and environmental finance.

Erick Rengifo is Associate Professor in the economics department at Fordham University. Professor Rengifo is an active scholar with interests in market microstructure, behavioral finance, risk management, insurance, microfinance, microinsurance, and econometrics. He is a private consultant in the fields of algorithmic trading, investments, risk management, microfinance, and microinsurance. He is a founder of Spes Nova Inc., a nonprofit corporation whose main goals are to provide funding to microenterprises, assist in market creation, and provide insurance products for the working poor around the world. He is also the founder and director of the Center for International Policy Studies. Professor Rengifo holds a PhD in economics with a concentration in finance and econometrics from Catholic University of Louvain-Belgium.

Simona Sanfelici is Associate Professor of mathematical methods for economics, actuarial sciences, and finance at the Department of Economics, University of Parma, Italy (since December 2005). Her background is in numerical analysis and her main research interests are volatility estimation for high-frequency financial data under market microstructure effects, option pricing, asset allocation, stochastic processes and stochastic differential equations, variational methods, numerical solution to degenerate nonlinear PDEs and to problems in unbounded domains, Galerkin finite element method, finite difference method, and Monte Carlo method.

Martin Scholtus (1984) obtained master degrees in economics (2007) and econometrics (2009), as well as a PhD in economics (2014) from the Erasmus University Rotterdam. His research focuses on high-frequency and algorithmic trading, in particular the performance of high-frequency technical trading strategies, the behavior of algorithmic traders around macroeconomic announcements, and their role in initial trading for newly listed stocks. Part of his work has been published in the Journal of Banking and Finance.

Tayyeb Shabbir is concurrently Adjunct Professor of finance, Department of Finance, Wharton School, University of Pennsylvania, Philadelphia, as well as tenured Full Professor of finance and Director of the Institute of Entrepreneurship at the College of Business and Public Policy at the California State University. Dr Shabbir has vast teaching, research, and consulting experience that has been acquired internationally. Previously, Dr Shabbir has served as a faculty member at the economics department of the University of Pennsylvania, Wharton Executive Education program, in the doctoral program at the Pennsylvania State University, University Park, and the LeBow School of Business at Drexel University. His areas of expertise include prediction, management, and prevention of financial crises, global financial flows, entrepreneurial finance, microfinance, and human capital investments. Dr Shabbir has scores of publications and competitive research grants to his credit and has also served as a consultant to the World Bank, UNDP, and the Asian Development Bank. Recently, acclaimed international academic publisher, Edward Elgar, published Dr Shabbir's book about financial crises which was coedited with Professor Lawrence Klein, Nobel Laureate in economics and Benjamin Franklin Professor of finance and economics at the University of Pennsylvania. Dr Shabbir is especially interested in policy-relevant analyses of global economic issues, financial crises, entrepreneurial finance, and financial markets. Dr Shabbir is frequently sought by press for interviews as an expert as well as a keynote speaker in professional meetings. Recently, he served as a CBAPP Consultant to Honda headquarters in Torrance for a training program about finance for Non-Finance Managers. He is also a regular speaker to the visiting Chinese delegations at the CSUDH's College of Extended Education as well as the Society of Government Accountants in South Bay, California.

Yanlin Shi is currently Assistant Professor in statistics at the Research School of Finance, Actuarial Studies and Applied Statistics in The Australian National University (ANU). His dissertation focuses on volatility modeling of high-frequency time series. He has published an article in the Thomson Reuters SSCI journal North American Journal of Economics and Finance, and presented papers at several international conferences, such as the 2014 China Meeting of the Econometric Society and the 19th International Congress on Modelling and Simulation, of which the conference proceedings are included in the Thomson Reuters CPCI. He received two masters degrees from ANU in the fields of applied statistics and business with the highest distinction. In 2009 and 2010, he was awarded the ANU Chancellor's Letters of Commendation for Outstanding Academic Achievements.

Abhay K. Singh is a B.Tech graduate with an MBA in finance from the Indian Institute of Information Technology, Gwalior, India and a PhD in finance from Edith Cowan University in Western Australia. He currently works as Postdoctoral Fellow in the School of Business at Edith Cowan University.

Russell Smyth is Professor and Head of the Department of Economics Monash University, Australia. He has published approximately 300 book chapters and journal articles in the fields of economics, law, and political science. His research interests encompass Asian economies, Chinese economic reform and financial economics, among others. From 1998 to 2008, he was Editor of Economic Papers, the policy journal of the Economic Society of Australia and was a member of the Central Council of the Economic Society of Australia. In 2008, he received the Honorary Fellow Award of the Economic Society of Australia. He is currently Associate Editor of Energy Economics and a member of seven editorial boards. There are 4600 citations to his research on Google Scholar.

M.Nihat Solakoglu is currently Assistant Professor in the banking and finance department of Bilkent University in Ankara, Turkey. He received his PhD in economics and masters degree in statistics from North Carolina State University. After graduation, he worked for American Express in the US at international risk and information management departments. His main interests are in applied finance and international finance. His papers have been published in Applied Economics, Journal of International Financial Markets, Institutions, and Money, Applied Economics Letters, and Economic Systems Research. His current interests are in herding in financial markets, the role of news arrival on return and volatility, the effect of exchange rate risk on trade, and the role of gender diversity on firm performance.

Masayuki Susai is Full Professor of international finance at the Faculty of Economics, Nagasaki University, Japan. He graduated from the Graduate School of Commerce at Waseda University with an MA. His research interests lie in international finance, including market microstructure in international financial markets, intervention in foreign exchange markets, and foreign exchange risk. He has edited two books, titled as Empirical Study on Asian Financial Markets (Kyushu Univ. Press) and Studies on Financial Markets in East Asia (World Scientific Pub.). His recently published articles appear in the Proceedings of the Institute of Statistical Mathematics and the Annals of the Society for the Economic Studies of Securities.

Rossen Trendafilov is Assistant Professor of economics in the Economics Department at Truman State University, where he teaches macroeconomics and financial economics. He maintains active academic research in the fields of financial economics, behavioral finance, financial econometrics, market microstructure, algorithmic trading, data mining, Fourier series analysis, wavelet analysis, and fractal analysis. He was a member of a hedge fund administration and also worked as a junior auditor and private consultant in Bulgaria. Professor Trendafilov holds a PhD in economics from Fordham University with a concentration in finance and market microstructure.

Dick van Dijk (1971) is Professor in financial econometrics at the Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam. His research interests include volatility modeling and forecasting, high-frequency data, asset return predictability, business cycle analysis, and nonlinear time series analysis. On these topics he has published widely in the International Journal of Forecasting, Journal of Applied Econometrics, Journal of Banking and Finance, Journal of Business and Economic Statistics, Journal of Econometrics, and Review of Economics and Statistics, among others. He coauthored the textbooks Nonlinear Time Series Models in Empirical Finance (with Philip Hans Franses; Cambridge University Press, 2000) and Time Series Models for Business and Economic Forecasting (with Philip Hans Franses and Anne Opschoor; Cambridge University Press, 2014).

Bonnie F. Van Ness is Otho Smith Professor of finance at the University of Mississippi. Bonnie is also Coeditor of The Financial Review and the department chair of finance. Bonnie received her undergraduate degree from the University of North Alabama, an MBA from the University of Mississippi, and PhD from the University of Memphis. Bonnie's primary research interest is market microstructure and she has published over 50 articles in this area.

Robert A. Van Ness is Bruce Moore Scholar of finance and Coeditor of The Financial Review. Robert received his undergraduate degree from Vanderbilt University, and an MBA and a PhD from the University of Memphis. Robert's primary research interest is market microstructure and he has published over 50 articles in this area.

Bruce Vanstone has over 7  years of experience as a portfolio manager, is Assistant Professor and holds a PhD in computational finance from Bond University in Australia. He has experience in applying statistics, mathematics, advanced technologies and computing to the development of investment processes and systems. A regular publisher and presenter at the international level, his book Designing Stock Market Trading Systems is available in most bookstores. His key skills are the development, testing, and benchmarking of quantitative trading and investment systems.

Camillo von Müller (PhD (HSG), MA (JHU), MA (HU)) is an economist at the German Federal Ministry of Finance in Berlin. He obtained a PhD in management/finance at the University of St Gallen, Switzerland, and has been Visiting and Teaching Fellow at Harvard University's Economics Department having also taught at the economics and social science departments at the universities of Zurich, St Gallen, and Leuphana University. Camillo has published widely in the field of management and finance. Prior to joining the Federal Ministry of Finance he has worked and consulted for nonprofit, public, and private sector institutions including Finance Watch in Brussels, the Ministry of Finance and Economics of Baden-Württemberg, and Deutsche Börse.

Yushi Yoshida is Full Professor of economics at the Faculty of Economics of Shiga University in Japan. Before joining Shiga University, he was Full Professor of economics at Kyushu Sangyo University. He obtained his MA and PhD in economics from Osaka University. His research interests lie in the area of international finance, including exchange rate pass-through, foreign exchange intervention, and international financial transmission. He has also written on empirical international trade, including intraindustry trade and extensive margin of exports. His recently published articles appear in the Asia Pacific Business Review, IMF Staff Papers, International Review of Economics and Finance, North American Journal of Economics and Finance, and World Economy. He is Pass-through Research Group researcher at Research Institute of Economics, Trade, and Industry (RIETI).

Zhaoyong Zhang obtained his PhD in economics from the Catholic University of Leuven (Belgium) in 1991, is currently Associate Professor of economics & finance and Head of Asian Business & Organizational Research Group (ABORG) in the School of Business at Edith Cowan University (ECU) in Australia. Previously, he was Professor of economics & finance at NUCB Graduate School of Commerce and Business in Japan, and Associate Professor and Director of CSTE at National University of Singapore (NUS). He held several visiting professor positions at ECU, Yokohama National University (YNU), ICSEAD (Japan), and KIEP (Korea), and was also Visiting Fellow/Adjunct (Associate) Professor at University of Western Australia, University of South Australia, University of Macau, as well as several universities in China. He also held several consulting positions with international institutions including OECD, IDRC, and Hanns Seidel Foundation (Germany). He has been included in the 2000 Outstanding Intellectuals in the twenty-first century by Cambridge International Biographical Centre in 2008; and also in Who's Who in the World in 2007–2012. His major research interests are International Trade and Finance, East Asian Financial Crisis, East Asia Monetary and Economic Integration, Foreign Exchange Policy and Reform in China. Zhaoyong has published 1 book manuscript, 34 chapters in book, and 53 articles in international journals, as well as (co)edited four special issues with the international journals including Papers in Regional Science in 2003 and The World Economy in 2006 and 2012, respectively.

Editor Biography

A native of Montreal, Professor Greg N. Gregoriou obtained his joint Ph.D. in finance at the University of Quebec at Montreal which merges the resources of Montreal's four major universities McGill, Concordia, UQAM, and HEC. Professor Gregoriou is Professor of Finance at State University of New York (Plattsburgh) and has taught a variety of finance courses such as alternative investments, international finance, money and capital markets, portfolio management, and corporate finance. He has also lectured at the University of Vermont, Universidad de Navarra, and at the University of Quebec at Montreal.

Professor Gregoriou has published 50 books, 65 refereed publications in peer-reviewed journals, and 24 book chapters since his arrival at SUNY Plattsburgh in August 2003. Professor Gregoriou's books have been published by McGraw-Hill, John Wiley & Sons, Elsevier-Butterworth/Heinemann, Taylor and Francis/CRC Press, Palgrave-MacMillan, and Risk Books. Four of his books have been translated into Chinese and Russian. His academic articles have appeared in well-known peer-reviewed journals such as the Review of Asset Pricing Studies, Journal of Portfolio Management, Journal of Futures Markets, European Journal of Operational Research, Annals of Operations Research, Computers and Operations Research, etc.

Professor Gregoriou is the derivatives editor and editorial board member for the Journal of Asset Management as well as editorial board member for the Journal of Wealth Management, the Journal of Risk Management in Financial Institutions, Market Integrity, IEB International Journal of Finance, and the Brazilian Business Review. Professor Gregoriou's interests focus on hedge funds, funds of funds, commodity trading advisors, managed futures, venture capital and private equity. He has also been quoted several times in the New York Times, Barron's, the Financial Times of London, Le Temps (Geneva), Les Echos (Paris), and L'Observateur de Monaco. He has done consulting work for numerous Canadian and US investment firms.

He is a part-time lecturer in finance at the School of Continuing Studies at McGill University, an advisory member of the Markets and Services Research Centre at Edith Cowan University in Joondalup (Australia), a senior advisor to the Ferrell Asset Management Group in Singapore, and a research associate with the University of Quebec at Montreal's CDP Capital Chair in Portfolio Management.

Acknowledgments

We would like to thank the handful of anonymous referees who helped in selecting the papers for this book. We thank Dr J. Scott Bentley, Mckenna Bailey, and Nicky Carter at Elsevier for their suggestions and continuing support throughout this process. In addition I would like to thank both the President of Barclay Hedge Sol Waksman and Beto Carminhato for their helpful comments and suggestions. Neither the editor nor the publisher can guarantee the accuracy of the papers in this book and it is solely the contributors who are individually responsible for their own papers. In addition, we thank eVestment (www.evestment.com) for use of their data and the Pertrac software.

Introduction

Chapter 1 documents stylized facts of overall trading activity and algorithmic trading activity in the S&P 500 ETF traded on NASDAQ over the period January 6, 2009 up to December 12, 2011. Overall trading activity is characterized by strong periodicity over the day, hour, minute, and second. Algorithmic activity at the top of the order book has no periodicity within the second and is mainly event-based, in particular, around macroeconomic news announcements. About 60% of all orders are canceled within 1  s after entering the order book. The percentage of bid or ask improvements that disappears within 1  s is 80%. Especially in 2009 vanished bid or ask improvements leave a worse order book behind.

Chapter 2 deals with the literature on high-frequency trading (HFT) and discussions on the desirability or otherwise of regulating the practice that are typically based on misconceptions and confusion as well as faulty reasoning. One argument against HFT is that it is a license to print money that is owned by a minority of market participants. The authors argue that there is no reason why HFT is particularly profitable and that the shortness of the holding period is not necessarily conducive to the generation of super profit. They further examine the relation between the holding period and profitability by calculating the profit generated from carry trade operations in the foreign exchange (FX) market with a wide range of holding periods. In this analysis they avoid the confusion between HFT and automated trading and define HFT only in terms of the holding period and the frequency of trading.

Chapter 3 looks at how HFT systems work by exploiting inefficiencies in the pricing process. Before embarking on designing a HFT system, it is important to confirm that the price data for the instrument one intends to trade exhibit inefficiencies at the time frame one intends to exploit. Tests for randomness and market efficiency should be conducted at the required time frame to confirm that the instrument is not efficient at that time frame. The results of these tests also give some direction to the future style of the trading system that is likely to be successful in the required time frame.

Chapter 4 examines the large literature using unit root tests to test for weak form of market efficiency in financial markets. Much of this literature takes account of the low power to reject the unit root null in the presence of structural breaks. However, the literature largely ignores the low power to reject the unit root null in the presence of heteroskedasticity. Heteroskedasticity is particularly problematic in high-frequency financial data. The authors extend the literature by applying a unit root test which accommodates both heteroskedasticity and structural breaks to hourly data for five ASEAN stock indices. Their results point to the importance of allowing for heteroskedasticity when testing for a random walk in high-frequency financial data.

Chapter 5 examines economies of co-location in standard and low latency trading environments. Existing evidence shows that HFT strategies include the exploitation of technical arbitrage opportunities. The authors discuss limitations to arbitrage opportunities that rest on co-location (Hawk-Dove Game), and models strategic and spatial consequences for money managers such as the technological and geographic segmentation of markets (von Thünen).

Chapter 6 describes the regulatory evolution of HFT with a focus on the European level. It illustrates differences between algorithmic trading and HFT and how the former is a more comprehensive genus of the latter. It also outlines the main HFT strategies, in particular with respect to the concept of liquidity. Finally the chapter takes into consideration the HFT regulatory framework laid down in the recently passed European Directive 2014/65/EU (the so-called MiFID II).

Chapter 7 shows how HFT has become more commonplace in the last few years, more importantly, it has become more noticeable by the general investing public as well as the policy makers. The growing use of HFT raises some important questions and the author will address the following three: (1) provide an introduction to the nature of HFT and its progression in terms of use in execution of financial investment order flow, (2) implication of HFT for market efficiency specifically in relation to the Efficient Market Hypothesis and (3) implications for ‘fairness’ in the financial markets.

Chapter 8 looks at Michael Lewis' book Flash Boys which paints a highly unsympathetic view of HFT. But while Lewis' book has focused public attention on the phenomenon of HFT,