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Real-time market microstructure analysis: online transaction cost analysis

R. Azencott, A. Beri, Y. Gadhyan, N. Joseph, Charles-Albert Lehalle and M. Rowley

Quantitative Finance, 2014, vol. 14, issue 7, 1167-1185

Abstract: Motivated by the practical challenge in monitoring the performance of a large number of algorithmic trading orders, this paper provides a methodology that leads to automatic discovery of causes that lie behind poor trading performance. It also gives theoretical foundations to a generic framework for real-time trading analysis. The common acronym for investigating the causes of bad and good performance of trading is transaction cost analysis Rosenthal [ Performance Metrics for Algorithmic Traders , 2009]). Automated algorithms take care of most of the traded flows on electronic markets (more than 70% in the US, 45% in Europe and 35% in Japan in 2012). Academic literature provides different ways to formalize these algorithms and show how optimal they can be from a mean-variance (like in Almgren and Chriss [ J. Risk , 2000, 3 (2), 5-39]), a stochastic control (e.g. Guéant et al. [ Math. Financ. Econ. , 2013, 7 (4), 477-507]), an impulse control (see Bouchard et al. [ SIAM J. Financ. Math. , 2011, 2 (1), 404-438]) or a statistical learning (as used in Laruelle et al . [ Math. Financ. Econ. , 2013, 7 (3), 359-403]) viewpoint. This paper is agnostic about the way the algorithm has been built and provides a theoretical formalism to identify in real-time the market conditions that influenced its efficiency or inefficiency. For a given set of characteristics describing the market context, selected by a practitioner, we first show how a set of additional derived explanatory factors, called anomaly detectors , can be created for each market order (following for instance Cristianini and Shawe-Taylor [ An Introduction to Support Vector Machines and Other Kernel-based Learning Methods , 2000]). We then will present an online methodology to quantify how this extended set of factors, at any given time, predicts (i.e. have influence , in the sense of predictive power or information defined in Basseville and Nikiforov [ Detection of Abrupt Changes: Theory and Application , 1993], Shannon [ Bell Syst. Tech. J. , 1948, 27 , 379-423] and Alkoot and Kittler [ Pattern Recogn. Lett. , 1999, 20 (11), 1361-1369]) which of the orders are underperforming while calculating the predictive power of this explanatory factor set. Armed with this information, which we call influence analysis , we intend to empower the order monitoring user to take appropriate action on any affected orders by re-calibrating the trading algorithms working the order through new parameters, pausing their execution or taking over more direct trading control. Also we intend that use of this method can be taken advantage of to automatically adjust their trading action in the post trade analysis of algorithms.

Date: 2014
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