The Science of Algorithmic Trading and Portfolio Management

Dedication

Preface

Acknowledgments

Chapter 1. Algorithmic Trading

Introduction

Changing Trading Environment

Recent Growth in Algorithmic Trading

Investment Cycle

Classifications of Algorithms

Types of Algorithms

Algorithmic Trading Trends

Trading Venue Classification

Types of Orders

Execution Options

The Trading Floor

Algorithmic Trading Decisions

Algorithmic Analysis Tools

High Frequency Trading

Direct Market Access

Chapter 2. Market Microstructure

Introduction

Market Microstructure Literature

The New Market Structure

Pricing Models

Order Priority

Equity Exchanges

New NYSE Trading Model

NASDAQ Select Market Maker Program

Empirical Evidence

Flash Crash

Conclusion

Chapter 3. Algorithmic Transaction Cost Analysis

Introduction

Unbundled Transaction Cost Components

Transaction Cost Classification

Transaction Cost Categorization

Transaction Cost Analysis

Implementation Shortfall

Evaluating Performance

Comparing Algorithms

Experimental Design

Final Note on Post-Trade Analysis

Chapter 4. Market Impact Models

Introduction

Definition

Graphical Illustrations of Market Impact

Developing a Market Impact Model

Derivation of Models

I-Star Market Impact Model

Model Formulation

Parameter Estimation Techniques

Chapter 5. Estimating I-Star Model Parameters

Introduction

Scientific Method

Solution Technique

Chapter 6. Price Volatility

Introduction

Definitions

Market Observations—Empirical Findings

Forecasting Stock Volatility

HMA-VIX Adjustment Model

Measuring Model Performance

Factor Models

Types of Factor Models

Chapter 7. Advanced Algorithmic Forecasting Techniques

Introduction

Trading Cost Equations

Trading Strategy

Trading Time

Trading Risk Components

Trading Cost Models—Reformulated

Timing Risk Equation

Comparison of Market Impact Estimates

Volume Forecasting Techniques

Forecasting Monthly Volumes

Forecasting Covariance

Efficient Trading Frontier

Chapter 8. Algorithmic Decision Making Framework

Introduction

Equations

Algorithmic Decision Making Framework

Chapter 9. Portfolio Algorithms

Introduction

Trader’s Dilemma

Transaction Cost Equations

Optimization Formulation

Portfolio Optimization Techniques

Portfolio Adaptation Tactics

Managing Portfolio Risk

Appendix

Chapter 10. Portfolio Construction

Introduction

Portfolio Optimization and Constraints

Transaction Costs in Portfolio Optimization

Portfolio Management Process

Trading Decision Process

Unifying the Investment and Trading Theories

Cost-Adjusted Frontier

Determining the Appropriate Level of Risk Aversion

Best Execution Frontier

Portfolio Construction with Transaction Costs

Conclusion

Chapter 11. Quantitative Portfolio Management Techniques

Introduction

Are the Existing Models Useful Enough for Portfolio Construction?

Pre-Trade of Pre-Trades

How Expensive is it to Trade?

MI Factor Scores

Alpha Capture Program

Chapter 12. Cost Index & Multi-Asset Trading Costs

Introduction

Cost Index

Real-Time Cost Index

Multi-Asset Class Investing

Multi-Asset Trading Costs

Chapter 13. High Frequency Trading and Black Box Models

Introduction

Data and Research

Strategies

Evaluation

Summary

References

Index