The Volume Clock: Insights into the High Frequency Paradigm

The Journal of Portfolio Management, (Fall, 2012) Forthcoming

Johnson School Research Paper Series No. 9-2012

23 Pages Posted: 5 Apr 2012 Last revised: 20 Aug 2012

David Easley

Cornell University - Department of Economics

Marcos Lopez de Prado

Guggenheim Partners, LLC; Lawrence Berkeley National Laboratory; Harvard University - RCC

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 30, 2012

Abstract

Over the last two centuries, technological advantages have allowed some traders to be faster than others. We argue that, contrary to popular perception, speed is not the defining characteristic that sets High Frequency Trading (HFT) apart. HFT is the natural evolution of a new trading paradigm that is characterized by strategic decisions made in a volume-clock metric. Even if the speed advantage disappears, HFT will evolve to continue exploiting Low Frequency Trading’s (LFT) structural weaknesses. However, LFT practitioners are not defenseless against HFT players, and we offer options that can help them survive and adapt to this new environment.

Keywords: high frequency trading, volume clock, low frequency trading, market microstructure

JEL Classification: G10

Suggested Citation

Easley, David and Lopez de Prado, Marcos and O'Hara, Maureen, The Volume Clock: Insights into the High Frequency Paradigm (March 30, 2012). The Journal of Portfolio Management, (Fall, 2012) Forthcoming ; Johnson School Research Paper Series No. 9-2012. Available at SSRN: https://ssrn.com/abstract=2034858 or http://dx.doi.org/10.2139/ssrn.2034858

David Easley (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Marcos Lopez de Prado

Guggenheim Partners, LLC ( email )

330 Madison Avenue
New York, NY 10017
United States

HOME PAGE: http://www.QuantResearch.org

Lawrence Berkeley National Laboratory ( email )

1 Cyclotron Road
Berkeley, CA 94720
United States

HOME PAGE: http://www.lbl.gov

Harvard University - RCC ( email )

26 Trowbridge Street
Cambridge, MA 02138
United States

HOME PAGE: http://www.rcc.harvard.edu

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

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