Alternatively, a short position is taken on an asset and subsequently it is unwound by buying the asset at a lower price. Market making works on a similar principle as the market maker buys at the lower bid price and sells at the higher ask price, thus realising as profit the bid-ask spread.
At that time the term HFT had not been coined yet. It was known as ‘computer-based trading’ or something close to that.
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Another example of statistical arbitrage is ‘pairs trading’, a strategy that aims at exploiting temporary deviations from a long-run relation between two cointegrated financial prices.
This is actually the prime characteristic of HFT and should come first.
‘Low latency’ refers to the rapid execution of transactions. It follows that HFT is a low-latency operation.
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Skill is a crucial factor in gambling and financial trading. However, there is no reason why high-frequency traders are more skilful than long-term traders (tell that to George Soros).
So what happened on the remaining 78 days? I assume that high-frequency traders incurred losses.
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The conventional definition of the Sharpe ratio is that it is the ratio of excess return over the risk-free rate to the standard deviation of the return.
The calculations are based on daily data covering the period 4 January 2010–1 January 2013.
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Indeed, the ongoing emergence of HFT has coincided with a period of high-market turbulence, regulatory reforms and regulatory actions.
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High-frequency traders typically operate with their own capital (no clients).
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