Low-Frequency Traders in a High-Frequency World: A Survival Guide

Marcos Lopez de Prado

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

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. [1996]) 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, G14

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Date posted: September 23, 2012 ; Last revised: May 26, 2014

Suggested Citation

Lopez de Prado, Marcos, Low-Frequency Traders in a High-Frequency World: A Survival Guide (September 23, 2012). Available at SSRN: https://ssrn.com/abstract=2150876 or http://dx.doi.org/10.2139/ssrn.2150876

Contact Information

Marcos Lopez de Prado (Contact Author)
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
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