Monday, May 9, 2011

Zubulake and Lee, The High Frequency Game Changer

The High Frequency Game Changer: How Automated Trading Strategies Have Revolutionized the Markets by Paul Zubulake and Sang Lee (Wiley, 2011) is not an engaging book. It was definitely not written for the retail investor. Instead, it reads like a series of mini-reports from a consulting firm. It should therefore come as no surprise that the co-authors are a senior analyst and the managing partner at Aite Group, “an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry.”

Rather than write a standard review, I’ll pick out two data points from the book that I think might be of general interest.

The number of electronic trade messages quadrupled between December 2006 and 2010. “If U.S. equities continue their pace, Aite Group expects message volumes to average 1.2 billion messages per day by 2011. The market already saw peak days approaching this number in late 2008. … Options pricing is exponentially worse than equities market data volumes. Current … OPRA data peaks exceed 1 million messages per second. Aite Group expects OPRA will generate peaks exceeding 2.2 million messages per second by the end of 2010.” (p. 47) I don’t know whether this projection came to pass, but the infrastructure demands are evident. No wonder some brokers charge for cancelled options orders.

I wrote about the importance of high performance databases in an earlier review. Zubulake and Lee confirm this: “Speed is essential for firms running strategies that feature both real-time and historical data. Aite Group estimates that 90% of quantitative trading firms currently maintain or are developing at least one trading strategy that requires playing back historical data in conjunction with real-time data.” (p. 113) Sure beats trying to keep all that history in your head!

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