making the spread
I’ve written here about exchange simulation in service of back-testing trading algorithms and briefly mentioned the difficulties of simulating the behavior of an order book. I just came across “A stochastic model for order book dynamics” by Cont, Stoikov and Talreja of Columbia and Cornell financial engineering groups. (I’ve also saved a local copy of the paper here.) While their focus isn’t on simulation for the purpose of back-testing but on probabilistic reasoning in real-time for high-frequency strategies, they illustrate a variety of models/methods for such reasoning. The equation depicted above is part of their description for reasoning about the likelihood of being able to make the spread in a stat arb strategy which places orders simultaneously at the bid and ask. It’s very technical, but interesting even if only to illustrate the kinds of tools being wielded in the service of algorithmic trading!
Thank you for your great articles. It’s realy a pleasure to read your blog.
I appreciate your kind feedback, Nicolas!
Is there a way to get an RSS feed (or email notification) for your posts> I realize this is done on wordpress, and there should usually be a way to get this, but for some reason, i simply am not able to find it. I seem to find a way to get a feed for comments, but not posts. Appreciate your help.
These are great articles ! thanks !
Thanks for your kind words, bgpl.
I’m not exactly a blogging maven, but I believe the rss url is: http://www.puppetmastertrading.com/blog/feed/