High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems

Chapter 18. Executing and Monitoring High-Frequency Trading

Once a high-frequency trading system is designed and back-tested, it is applied to live capital (i.e., executed). The execution process can be complex, particularly as the capital allocated to the strategy grows and the adverse cost of market impact begins to take effect. To maximize trading performance and minimize costs, the best high-frequency trading systems are executed through optimization algorithms. To ensure that all algorithms of the trading system work as intended, a strict monitoring process is deployed.

This chapter discusses the best contemporary practices in the execution and monitoring of high-frequency trading systems.

Execution optimization algorithms tackle the following questions:

• Should a particular order issued by the trading strategy be executed in full or in smaller lots?

• Should the order be optimally processed as a market or a limit order?

• Is there an order-timing execution strategy that delivers a better-than-expected order fill price, given current market conditions?

The optimization algorithms can be developed internally or purchased off the shelf. Off-the-shelf algorithms are often cheaper, but they are less transparent than internally developed platforms. Both external and internal execution optimization systems, however advanced, may possess unexpected defects and other skews in performance and result in costly execution blunders.

To detect undesirable shifts in costs and other trading parameters ...