On profitability and maximum tolerable latency in the high-frequency trading of a microtrend anomaly

James A. Primbs, Bogdan Mukhametkaliev, B. Ross Barmish and Sean Warnick

Journal of Investment Strategies

Abstract: Using Nasdaq ITCH data for Dow Jones Industrial Average stocks, we characterize the potential profitability and speed required for the exploitability of a stock trend-length anomaly via a high-frequency trading, microtrend-following strategy. We find that an idealized zero-latency trader could average up to 0.77% per day on an equally weighted portfolio, and more than 3% for specific stocks. However, the results are highly latency sensitive, and by relaxing the zero-latency assumption we calculate the maximum tolerable latency under which the strategy remains profitable to be 14.6 microseconds, on average, for the equally weighted portfolio and generally between 0 and 40 microseconds for individual components.

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