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Zubulake and Lee, The High Frequency Game Changer

  
Analysis, Education
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The High Frequency Game Changer: How Automated Trading Strategies Have Revolutionized the Markets by Paul Zubulake and Sang Lee (Wiley, 2011) is not an engaging book. It was definitely not written for the retail investor. Instead, it reads like a series of mini-reports from a consulting firm. It should therefore come as no surprise that the co-authors are a senior analyst and the managing partner at Aite Group, “an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry.”

Rather than write a standard review, I’ll pick out two data points from the book that I think might be of general interest.

The number of electronic trade messages quadrupled between December 2006 and 2010. “If U.S. equities continue their pace, Aite Group expects message volumes to average 1.2 billion messages per day by 2011. The market already saw peak days approaching this number in late 2008. … Options pricing is exponentially worse than equities market data volumes. Current … OPRA data peaks exceed 1 million messages per second. Aite Group expects OPRA will generate peaks exceeding 2.2 million messages per second by the end of 2010.” (p. 47) I don’t know whether this projection came to pass, but the infrastructure demands are evident. No wonder some brokers charge for cancelled options orders.

I wrote about the importance of high performance databases in an earlier review. Zubulake and Lee confirm this: “Speed is essential for firms running strategies that feature both real-time and historical data. Aite Group estimates that 90% of quantitative trading firms currently maintain or are developing at least one trading strategy that requires playing back historical data in conjunction with real-time data.” (p. 113) Sure beats trying to keep all that history in your head!

Traits of Livermore That Fueled His Success

  
  Education
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You know, and I know that human nature is like the leopard that can’t change his spots. Even armed with all the latest findings into the inner workings of our psyche, it seems to provide scant help-certainly when we need it the most. I don’t know about you, but it seems like a lot of people are crying foul when it comes to the market-like it’s a rigged game. I asked Jesse about that issue:

“Get the slips of the financial news agencies any day and it will surprise you to see how many statements of an implied semi-official nature they print. The authority is some “leading insider’ or a “prominent director” or “a high official” or “someone in authority” who presumably knows what he is talking about…Quite apart from the intelligent study of speculation everywhere the trader must consider certain facts in connection with the game in Wall Street. In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done. It is therefore well to remember that manipulation of some sort enters into practically all advances in individual stocks and that such advances are engineered by insiders with one object in view and one only and that is to sell at the best profit possible.”

So, is it not true that the more things change, the more they remain the same? What about all the talk about the retail investor leaving the market for good-because it’s not a level playing field? Do they not detest their own gullibility? Again, from Livermore: (more…)

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