Algorithmic Trading in a World with Fewer Traders

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					 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                        Algorithmic Trading in a World
                             With Fewer Traders
                                  David Leinweber
                                Haas Fellow in Finance
             Founding Director, Center for Innovative Financial Technology

                                        (abridged version for SIFMA site)


                                                               SIFMA Market Structure, May 10, 2008
            djl@haas.berkeley.edu
            http://cift.haas.berkeley.edu                       c. 2002-2008 D. Leinweber




                                                                      http://cift.haas.berkeley.edu



c. 2002-2008, D. Leinweber                                                                            1
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                                            CIFT




                             Finance              Computer Science




               Areas of Interest
                 • Web 2.0 for Finance & Investing
                     – Aggregate “Molecular” search
                     – Semantic web
                     – Collective Intelligence
                 • Wired Markets
                     – Algo trading, Quant+ Investing
                     – Intelligence Amplification
                     – Hardware for high speed markets
                 • Technology and market stability


c. 2002-2008, D. Leinweber                                           2
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                                                            An Internet-centric
                                                            trade journal buried
                                                          the traditional exchange
                                                               in a 1999 issue.

                                                            The exchanges are
                                                           still here. Changing,
                                                                  but here.

                                                          The Industry Standard
                                                                  isn’t.


                                                              (Aug. 16, 1999)




                                  Stock Exchanges:
                  Vanishing Floors, Vanishing Floor Traders
                • Gone:
                    – Toronto
                    – Tokyo
                    – London, Frankfurt, Paris…
                • Thinning seriously
                    – NYSE
                • Never there to begin with
                    – NASDAQ




c. 2002-2008, D. Leinweber                                                           3
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




c. 2002-2008, D. Leinweber                                4
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




              IBM Business Consulting Services, 2006




                                   Skills for the
                             employed trader of 2015?
                • Understand more complex analytics
                    – Fast, decimalized or less, small sizes
                    – BBO ain’t what it used to be
                    – Let a thousand fragments bloom
                    – Traditional screens a blur
                • Play well with computers
                    – Airline pilots and Anesthesiologists
                    – HCI & Visualization Skills




c. 2002-2008, D. Leinweber                                     5
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                   Human Computer Interaction




                                          Resistance is futile.




                    LOB & CLOB Visualizations




c. 2002-2008, D. Leinweber                                        6
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




               Representation of the book in the
               “Jaws” graphic.
                                                            Price
                                       Length of line
                                       Shows age of order

                                                                                   Sell orders

                                                                                          Cumulative
                                                                                        Volume at Price
                 Price                                                                    (or better)



                                                                                    Buy orders




                             Time

              Source: Charles Plott, Caltech Econ/HSS




               Short-term price prediction from
               order flow and book data: “Jaws”
                                           Trades           Order flow histories


                                                                                   Current sell book
                                                                                   (“upper jaw”)

                                                                                   Short-term price
                 Price                                                             prediction (“tongue”)
                                                                                   (Simplest algorithm is
                                                                                   to average the book.
                                                                                   Others examine
                                                                                   order flow.)



                                                                                   Current sell book
                                                                                   (“lower jaw”)
                                              Time
              Source: Charles Plott, Caltech Econ/HSS



c. 2002-2008, D. Leinweber                                                                                  7
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                                                           www.oculusinfo.com




                                                          www.oculusinfo.com




c. 2002-2008, D. Leinweber                                                      8
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                             Market Color Radar




                                  Spreadsheet Style Order Monitor




c. 2002-2008, D. Leinweber                                          9
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                             Visual Order Monitor – Normal Circumstances


                        BA
                                                 ArrRate
                                                  1
                                 SECAlert                      CanRate
                                                 0.5
                                                   0
                                    Heat                         Vol

                                     LiqRatio               Bid/AskV




                             Visual Order Monitor – Unusual Circumstances



                        SUNW
                                                 ArrRate
                                                   1
                                  SECAlert                   CanRate
                                                 0.5
                                                  0
                                    Heat                       Vol

                                      LiqRatio             Bid/AskV




c. 2002-2008, D. Leinweber                                                  10
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                     Which orders might need attention?




c. 2002-2008, D. Leinweber                                11
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                                                          http://cift.haas.berkeley.edu



c. 2002-2008, D. Leinweber                                                                12
 SIFMA May 9 '08 David Leinweber, djl@haas.berkeley.edu




                                http://cift.crowdvine.com




c. 2002-2008, D. Leinweber                                  13

				
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