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Flow Toxicity and Liquidity in a High Frequency World
Order flow is toxic when it adversely selects market makers, who may be unaware they are providing liquidity at a loss. We present a new procedure to estimate flow toxicity based on volume imbalance…
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The Microstructure of the “Flash Crash”: Flow Toxicity, Liquidity Crashes, and the Probability of Informed Trading
The “flash crash” of May 6, 2010, was the second-largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a…
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Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance
Recent computational advances allow investment managers to methodically search through thousands or even millions of potential options for a pro�table investment strategy. In many instances, the…
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The Volume Clock: Insights into the High-Frequency Paradigm
TLDR
It is argued that contrary to popular perception, speed is not the defining characteristic that sets high-frequency trading (HFT) apart, and HFT is the natural evolution of a new trading paradigm that is characterized by strategic decisions made in a volume-clock metric.
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Discerning Information from Trade Data
TLDR
A Bayesian model of inferring information from trade executions is developed and it is found that tick rule approaches and BVC are relatively good classifiers of the aggressor side of trading, but bulk volume classifications are better linked to proxies of information-based trading.
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Building Diversified Portfolios that Outperform Out of Sample
TLDR
The Hierarchical Risk Parity approach is introduced to address three major concerns of quadratic optimizers, in general, and Markowitz’s critical line algorithm (CLA), in particular: instability, concentration, and underperformance.
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The Probability of Backtest Overfitting
TLDR
It is shown that CSCV produces accurate estimates of the probability that a particular backtest is over-fit, through a numerical method that is called combinatorially symmetric cross-validation (CSCV).
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The Sharpe Ratio Efficient Frontier
We evaluate the probability that an estimated Sharpe ratio exceeds a given threshold in presence of non-Normal returns. We show that this new uncertainty-adjusted investment skill metric (called…
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The Microstructure of the ‘Flash Crash’: Flow Toxicity, Liquidity Crashes and the Probability of Informed Trading
The “flash crash” of May 6, 2010, was the second-largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a…
View on SSRN
The Exchange of Flow Toxicity
Flow toxicity can be measured in terms of the probability that a liquidity provider is adversely selected by informed traders. In previous papers the authors introduced the concept of…
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