HIGH FREQUENCY TRADING: Researchers Have Figured Out The Magic Number

flash baby costumeNo one can outrun the flash

Photo: midiman / Flickr

Speed, or lack thereof, kills.In one of the first studies to quantify the opportunity cost of slow algorithmic trades, Martin L. Scholtus and Dick van Dijk of the Erasmus University Rotterdam found that on an average trading day, a delay of 200 milliseconds can result in significant missed opportunities.

Setting up 27,424 technical trading rules for the S&P 500, NASDAQ 100 and Russell 2000 indexes, the researchers compared the difference in performance for optimal trades executed instantly versus those executed at delayed intervals.

Trades executed after 200 miliseconds underperformed the instant trades by 3% on average.

And after 1 second? Forget it.

“About 85% of all improvements to the best bid or ask (BBA) quote are either removed or fully executed within 1 second for (the S&P 500),” the researchers write. 

The figure was 60% for NASDAQ and 70% for the Russell 2000.

On days with low volatility, a delay of just 50 miliseconds can prove costly.

Here are the graphs that prove it:


Photo: SSRN


Photo: SSRN

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