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Empirical Limitations on High-Frequency Trading Profitability

Michael Kearns, Alex Kulesza and Yuriy Nevmyvaka
The Journal of Trading Fall 2010, 5 (4) 50-62; DOI: https://doi.org/10.3905/jot.2010.5.4.050
Michael Kearns
is a professor of computer and information science at the University of Pennsylvania in Philadelphia, PA.
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  • For correspondence: mkearns@cis.upenn.edu
Alex Kulesza
is a graduate student in computer and information science at the University of Pennsylvania in Philadelphia, PA.
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  • For correspondence: kulesza@cis.upenn.edu
Yuriy Nevmyvaka
is a portfolio manager at a quantitative hedge fund and a research associate in computer and information science at the University of Pennsylvania in Philadelphia, PA.
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  • For correspondence: yuriy2@seas.upenn.edu
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Abstract

Addressing the ongoing controversy of overly aggressive high-frequency trading practices in financial markets, Kearns, Kulesza, and Nevmyvaka report the results of an extensive empirical study estimating the maximum possible profitability of such practices and arrive at figures that are surprisingly modest. Their findings highlight the tension between execution cost and trading horizon that is confronted by high-frequency traders. They provide a controlled and large-scale empirical perspective on the high-frequency debate that has heretofore been absent. The authors’ study employs a number of novel empirical methods, including the simulation of an “omniscient” high-frequency trader who can see the future and act accordingly.

TOPICS: VAR and use of alternative risk measures of trading risk, simulations, financial crises and financial market history

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The Journal of Trading: 5 (4)
The Journal of Trading
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Fall 2010
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Empirical Limitations on High-Frequency Trading Profitability
Michael Kearns, Alex Kulesza, Yuriy Nevmyvaka
The Journal of Trading Sep 2010, 5 (4) 50-62; DOI: 10.3905/jot.2010.5.4.050

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Empirical Limitations on High-Frequency Trading Profitability
Michael Kearns, Alex Kulesza, Yuriy Nevmyvaka
The Journal of Trading Sep 2010, 5 (4) 50-62; DOI: 10.3905/jot.2010.5.4.050
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  • Article
    • Abstract
    • RELATED WORK
    • CONSTRAINTS ON HFT
    • METHODOLOGY AND DATA
    • OMNISCIENT ORDER BOOK TRADING
    • MARKET-WIDE EXTRAPOLATION
    • PERSPECTIVE
    • ENDNOTES
    • REFERENCES
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