HIGH-FREQUENCY
TRADING
Figure 6 shows the first two levels of the
order book. The order book is split into
two sides: bids (prices at which people
are willing to buy); and asks or offers
(prices at which people are willing to
sell). A queue consists of the individual
orders within a price.
Queue Life: Getting to the front
Orders are executed in a first-in, first-
out manner (in most marketplaces).
When describing the life of an indi-
vidual order in an individual queue,
we often say that X is ahead, and Y
is behind. More generally, we say we
are in the top X of the queue. This
is called the queue position. Figure 7
shows an order in the middle of the
queue by the last time step: there are
six shares in front of the order, and
eight shares behind it. The longer an
order is in the queue, the more likely
it is to get to the front. The speed at
which an order gets to the front is
a function of two things: the rate of
trading (trades take orders off the
front of the queue); and the rate of
cancelling of other orders.
Trading rates are somewhat difficult to estimate, but there is a clear
relationship between the probability
an order will get executed and the ra-
figure 9. the empirical cancel rate.
0.2
0.4
0
0.6
0.8
1
1. 2
0
0
.03
0
.06
0
.09
0
. 1
2
0
. 1
5
0
. 1
8
0
. 2
1
0
. 2
4
0
. 2
7
0.30.330.360.390.420.450.480.510.540.570.60.630.660.690.720.750.780.810.840.870.90.930.960.99
Empirical Cancel Rate, as subject of your place in the queue (as %)
figure 10. two methods of getting to the front of the queue.
9
10
11
8
Bid Ask
5
15
20
21
Time
0
10
11
8
Bid Ask
20
20
21
Time
1
10
11
8
Bid Ask Time
2
9
20
20
21
3
9
10
11
8
Bid Ask
25
15
20
21
Time
0
Time
1
Time
2
9
10
11
8
Bid Ask
25
15
20
21
11
8
Bid Ask
25
20
21
9
9
(a) Getting to the Front: Promotion (b) Getting to the Front: Joining
We have
a market at
the second
level that
has been
sitting there
for a while
A trade occurs
and wipes out
the best bid
queue
We are now at
the best bid,
with good
queue position
There is a
very large bid
imbalance
(pUP is high)
We join
the best bid,
b/c we are
reserving
a spot for later
Some people
join behind
us, the ask
queue gets
eliminated,
we are
now setup
10
10
8
Bid Ask
25
15
20
21
25
15
20
21
25
15
20
21
Time
0
Time
1
Time
2
98
Bid Ask
11
8
Bid Ask
(c) Getting to the Front:
Joining to help make the spread
There is an
imbalance
(pUP is high
enough to stay.)
Say pUP = . 4,
so pDN = . 6
If our Submit
Thresh is . 45,
then we can
join this ask
(pDN > . 45
Some people
join behind our
ask, and we are
in front of the
bid queue. So,
in theory, if
we get executed
on the bid,
we do not need
the ENTIRE ask
queue to get
executed, the
amount in front
of our ask.
9
9
10
11
11
(a) Promotion (b) Joining (c) Joining to help make the spread
