Low-Frequency Traders in a High-Frequency World: A Survival Guide
Marcos Lopez de Prado
Hess Energy Trading Company; Lawrence Berkeley National Laboratory; RCC at Harvard University
September 23, 2012
Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range.
The PIN Theory (Easley et al. ) reveals the Microstructure mechanism by which:
– Market Makers adjust their trading range to avoid being adversely selected by Informed Traders.
– Informed Traders reveal their future trading intentions when they alter the Order Flow.
– Consequently, Market Makers’ trading range is a function of the Order Flow imbalance.
VPIN is a High Frequency estimate of PIN, which can be used to detect the presence of Informed Traders, monitor liquidity conditions and forecast microstructural volatility.
Number of Pages in PDF File: 41
Keywords: Market Microstructure, VPIN, Order Flow, Informed Traders, Liquidity Providers, Adverse Selection
JEL Classification: C02, D52, D53, G14working papers series
Date posted: September 23, 2012 ; Last revised: April 22, 2013
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