About the Web Site High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems Book

parameter values

The 10 generations thus ETH yield a total of 450 individuals, ranked by their Sharpe ratio. Note that, since we retain all individuals from generation to generation, the highest Sharpe ratio the cumulative population never decreases in subsequent generations. We performed genetic search at the beginning of the experiment, aiming to obtain the values of the AS model parameters that yield the highest Sharpe ratio, working on the same orderbook data. At each training step the parameters of the prediction DQN are updated using gradient descent. An early stopping strategy is followed on 25% of the training sets to avoid overfitting. The architecture of the target DQN is identical to that of the prediction DQN, the parameters of the former being copied from the latter every 8 hours.

  • Deciding for the best bid and ask prices that a market maker sets up is a hard and complex problem in many aspects due to the fact that the problem should be tackled as a combined problem of the modeling the asset price dynamics and the optimal spreads.
  • Another distinctive feature of our work is the use of a genetic algorithm to determine the parameters of the AS formulas, which we use as a benchmark, to offer a fairer performance comparison to our RL algorithm.
  • This part intends to show the numerical experiments and the behaviour of the market maker under the results given in Sect.
  • The figures represent the percentage of wins of one among the models in each group against all the models in the other group, for the corresponding performance indicator.
  • The role of a dealer in securities markets is to provide liquidity on the exchange by quoting bid and ask prices at which he is willing to buy and sell a specific quantity of assets.
  • This may be a consequence of the markedly stochastic nature of market behaviour, which tends to limit the predictive power of any feature to proximate market movements.

Are the related depths at which the market maker posts the limit orders. Cricket teams are ranked to indicate their supremacy over their counter peers in order to get precedence. Various authors have proposed different statistical techniques in cricketing works to evaluate teams. However, it does not work well to realize the consistency of the teams’ performance. With this aim, effective features are constructed for evaluating bowling and batting precedence of teams with others. Eventually, these features are integrated to formulate the Consistency Index Rank to rank cricket teams.

High-frequency trading in a limit order book

We introduce an expert deep-learning system for limit order book trading for markets in which the stock tick frequency is longer than or close to 0.5 s, such as the Chinese A-share market. This half a second enables our system, which is trained with a deep-learning architecture, to integrate price prediction, trading signal generation, and optimization for capital allocation on trading signals altogether. It also leaves sufficient time to submit and execute orders before the next tick-report. Besides, we find that the number of signals generated from the system can be used to rank stocks for the preference of LOB trading. We test the system with simulation experiments and real data from the Chinese A-share market. The simulation demonstrates the characteristics of the trading system in different market sentiments, while the empirical study with real data confirms significant profits after factoring in transaction costs and risk requirements.


Machine learning approaches have been explored to obtain dynamic limit order placement strategies that attempt to adapt in real time to changing market conditions. As regards market making, the AS algorithm, or versions of it , have been used as benchmarks against which to measure the improved performance of the machine learning algorithms proposed, either working with simulated data or in backtests with real data. The literature on machine learning approaches to market making is extensive. Inventory management is therefore central to market making strategies , and particularly important in high-frequency algorithmic trading. In an influential paper , Avellaneda and Stoikov expounded a strategy addressing market maker inventory risk.


3 with stock price dynamics as “Model 1” and the model with the dynamics “Model 2”. It is observed that the thickness of the market prices is correlated with the trading intensity inversely. As a larger trading intensity decreases the market impact in execution which leads a decrease in price movements; it causes a lower price that is presented in Fig. This is a small inventory-risk aversion value but is enough to force the inventory process to revert to zero at the end of the trading.

Market-making by a foreign exchange dealer – Risk.net

Market-making by a foreign exchange dealer.

Posted: Wed, 10 Aug 2022 07:00:00 GMT [source]

The cumulative profit resulting from a market maker’s operations comes from the successive execution of trades on both sides of the spread. This profit from the spread is endangered when the market maker’s buy and sell operations are not balanced overall in volume, since this will increase the dealer’s asset inventory. The larger the inventory is, be it positive or negative , the higher the holder’s exposure to market movements. Hence, market makers try to minimize risk by keeping their inventory as close to zero as possible. Market makers tend to do better in mean-reverting environments, whereas market momentum, in either direction, hurts their performance.

The results obtained suggest avenues to explore for further improvement. First, the reward function can be tweaked to penalise drawdowns more directly. Other indicators, such as the Sortino ratio, can also be used in the reward function itself. Another approach is to explore risk management policies that include discretionary rules. Alternatively, experimenting with further layers to learn such policies autonomously may ultimately yield greater benefits, as indeed may simply altering the number of layers and neurons, or the loss functions, in the current architecture. Maximum drawdown registers the largest loss of portfolio value registered between any two points of a full day of trading.

Also, deploying monitors provides a virtual backbone for multi-hop avellaneda and stoikov transmission. However, adding secure points to a WANET can be costly in terms of price and time, so minimizing the number of secure points is of utmost importance. Graph theory provides a great foundation to tackle the emerging problems in WANETs.

Most of the avellaneda and stoikov, the Java source code and the results are accessible from the project’s GitHub repository . Mean decrease accuracy , a feature-specific estimate of average decrease in classification accuracy, across the tree ensemble, when the values of the feature are permuted between the samples of a test input set . To obtain MDA values we applied a random forest classifier to the dataset split in 4 folds. Private indicators, consisting of features describing the state of the agent. We model the market-agent interplay as a Markov Decision Process with initially unknown state transition probabilities and rewards.

Together, a) and b) result in a set of 2×10d contiguous buckets of width 10−d, ranging from −1 to 1, for each of the features defined in relative terms. Approximately 80% of their values lie ETH in the interval [−0.1, 0.1], while roughly 10% lie outside the [−1, 1] interval. Values that are very large can have a disproportionately strong influence on the statistical normalisation of all values prior to being inputted to the neural networks. By trimming the values to the [−1, 1] interval we limit the influence of this minority of values. The price to pay is a diminished nuance in the learning from very large values, while retaining a higher sensitivity for the majority, which are much smaller.

Buy low, sell high: A high frequency trading perspective

Under real trading conditions, therefore, there is room for improvement upon the orders generated by the closed-form AS model and its variants. Where tj is the current time upon arrival of the jth market tick, pm is the current market mid-price, I is the current size of the inventory held, γ is a constant that models the agent’s risk aversion, and σ2 is the variance of the market midprice, a measure of volatility. The main contribution of this paper is a new integral deep LOB trading system that embraces model training, prediction, and optimization. Inspired by the model architecture in Zhang et al., 2018, Zhang et al., 2019, we adopt the deep convolutional neural network model, which has a structure of convolutional layers and includes an inception module and LSTM module. However, because of the characteristics of imbalanced classification, we replace the categorical cross-entropy loss function with the focal loss function. It is necessary to pay more attention on the minority cases and capture the patterns of these valuable long and short signals.

Low-rank approximation algorithms aim to utilize convex nuclear norm constraint of linear matrices to recover ill-conditioned entries caused by multi-sampling rates, sensor drop-out. However, these existing algorithms are often limited in solving high-dimensionality and rank minimization relaxation. In this paper, a robust kernel factorization embedding graph regularization method is developed to statically impute missing measurements. Specifically, the implicit high-dimensional feature space of ill-conditioned data is factorized by kernel sparse dictionary. Then, a robust sparse-norm and graph regularization constraints are performed in the objective function to ensure the consistency of the spatial information. For the optimization of the parameters involved in the model, a distributed adaptive proximal Newton gradient descent learning strategy is proposed to accelerate the convergence.

Another distinctive https://www.beaxy.com/ of our work is the use of a genetic algorithm to determine the parameters of the AS formulas, which we use as a benchmark, to offer a fairer performance comparison to our RL algorithm. The goal of this paper is first to propose an optimal quoting strategy that is adopted by the stochastic volatility, drift effect and market impact by the amount and type of the orders in the price dynamics. We also consider the case of the market impact occuring by the jumps in volatility dynamics.

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