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

41 Pages Posted: 23 Sep 2012 Last revised: 26 May 2014

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; AQR Capital Management, LLC

Date Written: September 23, 2012

Abstract

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.

Keywords: Market Microstructure, VPIN, Order Flow, Informed Traders, Liquidity Providers, Adverse Selection

JEL Classification: C02, D52, D53, G14

Suggested Citation

López 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

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

AQR Capital Management, LLC

One Greenwich Plaza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com

Register to save articles to
your library

Register

Paper statistics

Downloads
3,444
Abstract Views
13,705
rank
2,801
PlumX Metrics