2007 May 28 - Mon
Opportunities for High Frequency Traders
Here is an article entitled Opportunities for High Frequency Traders:
Intraday Patterns in Price Volatility
and Liquidity of SFE Contracts by Professor Alex Frino and Grant Wearin of the
University of Sydney, Australia in association with the Sydney Futures Exchange.
I've recently put together some scanning software to look for symbols with high daily
volatility. This easy to read paper, confirms what I've found out about daily patterns of
volatility. In addition, it adds to my knowledge regarding bid/ask spreads in
relationship to depth analysis. The paper also
discusses the Predictability of Price Movements of SFE Contracts in relationship to
the time of day where it might be easier to predict.
An Power Point Presentation by Robert Engle entitled Predicting
Returns and Volatilities with Ultra-High Frequency Data offers up some additional
confirming evidence of how the markets work when traders are 'in the know'. Here are a few
interesting highlights:
- The price impacts, the spreads, the speed of quote revisions, and the volatility all
respond to information variables
- Transition is faster when there is information arriving, where an econometric measure
of information includes high shares per trade, shor duration between trades, and sustained
wide spreads
- Both the realized and the expected duration impact the distribution of the price
changes for the data studied
- Transaction rates tend to be lower when the price are falling
- Transaction rates tend to be higher when volatility is higher
- Simulations suggest that the long run price impact of a trade can be very sensitive to
the volume but is less sensitive to the spread and the transaction rates
Mark Hooker at Advanced Research Center has an article called Microstructure-Based Predictors. The end of the article has a nice
wrap-up:
There is ... a ... benefit from
efficient
volatility forecasting. It turns out that a good volatility forecast can help us to forecast
periods of trending and mean-reversion (or non-trending) in currency returns. For the
technical component of our currency management strategy, such forecasts are very valuable
since they can provide an early warning of when trending periods are likely to end and
therefore allow time to close positions and book profits before the market turns around.
A Google search term for "high frequency volatility trading" works quite well.
|
