Index
‘Note: Page numbers followed by “f ” indicate figures and “t” indicate tables.’
A specifying trading goal, 330e337
AC market impact model. See Almgren
and Chriss market impact model
(AC market impact model)
Acquisition costs, 481e484
Active fund, 8
Active manager, 8
Actual market volume, 249
Actual portfolio return, 68
Adaptation tactic, 343
comparison across, 345e346
modified, 346e348
reoptimization, 347e348
specifying, 337e338
target cost, 340e342
Adaptive pricing, 337
Adjusted return for portfolio, 441
Advanced algorithmic modelling
techniques
managing portfolio risk, 395e403
TR equation, 382e388
trading cost equations, 375e376
trading cost modelsereformulated,
380e382
trading risk components, 379e380
trading strategy, 376e378
trading time, 378e379
ADVs. See Average daily volumes
(ADVs)
Agency
execution, 19
transaction, 46
Aggressive algorithms, 4, 31
in money, 342e343
Aggressive in-money (AIM), 338, 342,
344e345
Aggressive strategy, 444
AIM tactics. See Asset Information
Model tactics (AIM tactics)
Algorithmic decision-making frame-
work, 20e21, 323e329, 337
aggressive in money, 342e343
benchmark price selection,
326e329
equations, 324e325
insight, 335e337
PIM, 343e345
projected cost, 338e345
variables, 324e325
Algorithmic desk (“algo” desk). See
Electronic tradingddesk
Algorithmic optimization, 333
Algorithmic trading, 1e3, 2f, 23, 34, 50,
223, 323
advantages, 25e26
algorithms types, 31e35
classifications of algorithms, 31
day of week effect, 37e39
decisions, 47e49
limit order models, 48
macro level strategies, 47e48
microlevel decisions, 48
SOR, 48e49
disadvantages, 26e27
DMA, 54e56
execution options, 46
growth in, 27e28
HFT, 50e54
intraday trading profiles, 39e42
market participants, 28e30
revenue pricing models, 45e46
techniques, 302
tools
intraday analysis, 49
posttrade analysis, 49e50
pretrade analysis, 49
trading venue classification, 42e44
trends, 35e36
types of orders, 44
Algorithmic usage patterns, 34e35
Almgren and Chriss market impact
model (AC market impact
model), 99, 115e120. See also
I-Star market impact model
random walk with market impact,
118e120
random walk with price drift, 117
Alpha. See Price appreciation
Alpha capture program, 470,
512e518
curves, 516e518, 516t
examples, 513e516
optimization, 515
Alpha cost, 513
Alpha generating strategy, 9e11
Alternative market impact modeling
approaches, 99
Alternative trading systems (ATS),
27e28
AMM. See Auto Market Making
(AMM)
Analysis period, 252
ANN. See Artificial neural network
(ANN)
Annualized volatility, 254
API. See Application programming
interfaces (API)
Application programming interfaces
(API), 474
ARCH model. See Auto-regressive
heteroscedasticity model (ARCH
model)
Arithmetic mean, 135
ARMA. See Autoregressive moving
average (ARMA)
Arrival cost, 250
Arrival price
algorithm, 32e33
benchmark, 326e327
frontier, 329e330
Artificial intelligence, 223
Artificial neural network (ANN), 231
Asset allocation, 5, 11
Asset Information Model tactics (AIM
tactics), 368e371, 370f
ATS. See Alternative trading systems
(ATS)
Auto Market Making (AMM), 30,
50e52
black-box trading models, 51
Auto-regressive heteroscedasticity
model (ARCH model),
274e275
Automated trading. See Algorithmic
trading
Autoregressive moving average
(ARMA), 301, 309e310
analysis goal, 311e312
autoregressive parameter, 315e316
daily forecasting model, 311, 316
day of week effect, 315f
estimation, 314
forecast improvements, 316
577
578 Index
Autoregressive moving average
(ARMA) (Continued )
forecast intraday volumes profiles,
317e321, 319f
predicting remaining daily volume,
321e322
Autoregressive parameter, 315e316
Average daily volumes (ADVs), 35,
112, 234, 249, 254, 301e306,
305f, 309e310, 312, 431e432,
469, 484e486. See also Fore-
casting daily volumes (FDV)
analysis, 304e305
definitions, 303e304
methodology, 303
monthly volume forecasting model,
304, 307t
regression results, 306
Average return, 270
Average trade size, 35
Average trading cost component, 67
B deposit, 13
Back-loaded profile. See Intraday
volume profile
Back-testing, 470e471, 563
strategies, 487e490
Balanced data sets, 96
Basket, 11e12
algorithms, 33, 349
Benchmark index, 440e441
Benchmark price
performance, 75e76
selection, 326e329
arrival, 326e327
comparison, 329e345
future, 328e329
historical, 327e328
Best execution, 58
frontier, 448e449
quest for, 451e456
Beta, 273
investment allocation, 498
Big data, 222
Binomial distribution, 149
Black-box trading. See Algorithmic
trading
Block trading, 36, 432
desk. See Cash trading desk
Bond(s), 14, 505
index ETF, 506
Bootstrapping techniques, 211e212
Bottom up credit strategy, 14 Concave shape of market impact
Bottom-up approach, 99 function, 114e115
Broker(s), 97, 405e408, 418, 543e544 Conjugate gradient step, 523
broker-dealers, 24 Constant relative risk aversion (CRRA),
models, 472 343e344
pretrade estimates, 554 Constraint description, 355e358
trading desks, 16e17 objective function difficulty,
BroydeneFletchereGoldfarbeShanno 357
algorithm, 523 optimization objective function
Buy and hold investing, 503 simplification, 358
Buy-initiated trade, 246 Continuous distribution functions
Buy-side firms, 520 chi-square distribution, 145
Buy-side traders, 25 exponential distribution, 143e144
log-normal distribution, 141
C logistic distribution, 146e147
Capital asset pricing model (CAPM), normal distribution, 137
246, 429e430 probability distribution function,
Capital commitment. See Principal bid 132e135
CAPM. See Capital asset pricing model standard normal distribution, 138
(CAPM) student’s t-distribution, 139e140
CART models, 228 triangular distribution, 148
Cash uniform distribution, 142
Convergence process, 524
dividend, 14 Conversions, 567
trading desk, 16 Convex shape of market impact
Cashflow trade, 13e14 function, 114
cdf. See Cumulative density function Corporate action, 10
(cdf) Corporate buy-back model, 565
Chi-square distribution, 145 Corporations, 561
Chi-square goodness of fit, 93e94 Correlation, 271
Classification analysis, 228e229, measures, 309
529 Cost, 67, 115, 255
Classification based supervised learning, allocation method, 123e125
224 cost-adjusted frontier, 445e447
Cluster analysis, 224e226, 529 costerisk optimization, 333
cmf. See Cumulative mass function curves, 262, 469e470, 553, 564
(cmf) index, 489e490
Co-location of servers, 52e53 measure, 66
CobbeDouglas production function, premium, 484
200 Covariance, 271, 280e288
Coefficient of variation, 42, 136 matrix, 287, 290, 298, 453e454
Commission, 59 Cramer’s rule, 164, 172e173
commission-based model, 45e46 Credit strategy, 14
Commodities, 505 Cross sectional multi-factor model,
Company news, 10 294e295
Company outlook, 10 Cross-sectional model, 296
Company specific risk. See Stock CRRA. See Constant relative risk
specific risk aversion (CRRA)
Competition, 504 Cumulative density function (cdf),
Completion, 355 130e131
Compliance managers, 545 Cumulative mass function (cmf),
Compliance officers, 561, 564 130

Cumulative Trade Cost Distribution Economic outlook, 14
graph, 552e553 Efficient investment frontier (EIF), 429,
Currency, 506 433, 441, 445
Customer order data, 247 Efficient trading frontier (ETF), 358,
375, 391e392, 393f, 433, 441
D with and without short positions,
Daily forecasting model, 311, 316 437e438, 438f
Dark pool, 42e43 Eigenvalue-eigenvector, 296
algorithms. See Passive pool algorithms decomposition, 297e298
controversies, 43e44 Electronic algorithmic trading, 1
Data Electronic communication networks, 28
grouping, 182, 257 Electronic trading, 1e3, 2f, 27e28
sampling, 207 desk, 17
science, 221e222 Equal weighted mean. See Arithmetic
scientists, 221e222 mean
visualization, 221e222 Equality constraint matrix, 373
Day of week effect, 37e39 Equity/equities, 495e496, 504
Decision trees, 228 analysts, 17e18
Decision-making framework, 456 research, 15
Decoding engineering broker models, sales, 18e19
405e406 trading, 16
portfolio optimization, 416e428 Error analysis, 252, 262e265
pre-trade of pre-trades, 406e416 Error sum of squares (SSE), 155
Deep learning algorithms, 530 Estimating parameters, 202e204,
Degrees of freedom, 283e288 219
Delay cost, 60e61 MLE, 202e204
Delay-related component, 62e63, 72 ETF. See Efficient trading frontier
Descriptive statistics, 135e136 (ETF); Exchange-traded fund
Developer’s dilemma, 367 (ETF)
Direct market access (DMA), 54e56, 59 Evaluate model performance, 206
Discrete distributions. See also Event states, 228
Continuous distribution EWMA. See Exponential Weighted
functions Moving Average (EWMA)
binomial distribution, 149 Excel functions, 549
Poisson distribution, 150 Exchange-traded fund (ETF), 296,
Discrete probability distribution 495e497, 504
function, 131e132 bond index, 506
discrete random variable, 131t dividend-yielding, 506
Dispersion, 271e272 Execution
Displayed market, 42 algorithms, 3
Distribution analysis, 92 complete, 69
Diversifiable risk. See Stock specific options, 46
risk strategies, 443e445, 469e470
Dividend-yielding ETF, 506 Expanded IS, 71e74
DMA. See Direct market access (DMA) Expected cost, 327
Drift. See Price appreciation Expected stock return, 452
Dynamic optimization, 337 Experimental tests, 236
Exponential decay function, 107
Exponential distribution, 143e144
E Exponential trade schedule, 519
Economic indicators, 14 Exponential Weighted Moving Average
Economic opportunity cost analysis, 516 (EWMA), 274e275, 390
Index 579
F
F-statistic, 169
F-test, 159, 165
Factor correlation matrix, 256, 256t, 291
Factor exposure liquidity, 503
Factor independence, 256
Factor models, 207, 288e292
cross sectional multi-factor model,
294e295
index model, 292e293
multi-index models, 293
single-index model, 292e293
macroeconomic factor models,
293e295
matrix notation, 289e292
statistical factor models, 295e299
Factor risk, 292
False relationships, 281e283
false negative signal calculations, 281,
282t, 283f
false positive signal calculation,
281e283, 284t, 285f
FDV. See Forecasting daily volumes
(FDV)
Federal open market committee
(FOMC), 314
Fees, 59
Filtering, 255
Financial crisis, 28e29
Financial modeling, 221
Financial transaction costs, 65
First wave of portfolio optimization, 434
Fixed cost components, 65
Flight to quality, 12
FOMC. See Federal open market com-
mittee (FOMC)
Forecast improvements, 316
Forecast intraday volumes profiles,
317e321, 319f
Forecasting, 223
stock volatility, 274e280
determining parameters via MLE,
277e280
volatility models, 274e277
Forecasting covariance, 390e391
Forecasting daily volumes (FDV),
309e322, 313f. See also
Average daily volumes (ADVs)
analysis, 310e311
definitions, 310e311
methodology, 311
variable notation, 311
580 Index
Foreign exchange (FX), 501
trading cost, 506
Forward-looking view of portfolio
construction, 451
Fractional linear regression model, 417
Fractional polynomial model, 199
Fractional regression model, 152, 152f,
172e173, 199
Front-loaded profile. See Intraday vol-
ume profile
Funds, 547
hedge, 28
manager, 6e7
mandates, 430e431
Futures, 497e498, 504e505
price benchmark, 328e329
views reflection, 431
FX. See Foreign exchange (FX)
G I-Star market impact model, 120,
Game-playing algorithms, 223
GARCH. See Generalized auto-regres-
sive conditional heteroscedastic-
ity (GARCH)
Gaussian distribution. See Continuous
probability distribution function
Generalized auto-regressive conditional
heteroscedasticity (GARCH),
274, 276, 390
Generalized reduced gradient, 523
Global equity markets, 500e501
GPS, 223
Group centroid, 225
Grouping data, 182, 257
H cost, 255
Heat-maps, 221e222
Hedge funds, 28
quant, 30
Hedging, 13
Heisenberg uncertainty principle
of finance, 100
of trading, 490e491
Heteroskedasticity, 256
HFT. See High frequency traders/trading
(HFT)
Hidden transaction costs, 65
High frequency traders/trading (HFT), 4,
24, 28e30, 50e54, 563
AMM, 50e52
quant trading/statistical arbitrage, 52
rebate/liquidity trading, 52e54
Historical data and covariance,
280e288
degrees of freedom, 283e288
false relationships, 281e283
Historical look-back period, 310
Historical Moving Average (HMA),
274e275
Historical price benchmark, 327e328
Historical trading cost, 489
Historical volatility, 269
HMA. See Historical Moving Average
(HMA)
HMA-VIX adjustment model, 274,
276e277, 390
Hyperaggressive algorithm, 336
Hypothesis testing, 205e206
I expanded IS, 71e74
234e235. See also Almgren and
Chriss market impact model
(AC market impact model)
data set, 245e250
data definitions, 248
estimating model parameters, 255e267
cost curves, 262
sensitivity analysis, 257e261
statistical analysis, 262e265
stock-specific error analysis,
265e267
formulation, 121e122, 126e128
model verification, 250e255
ADV, 254
analysis period, 252
annualized volatility, 254
error analysis, 252
first price, 254
graphical illustration, 251
imbalance, 252e253
number of data points, 252
POV rate, 255
regression analysis, 251
side of imbalance, 253
size of imbalance, 254
stock universe, 252
time period, 252
turnover, 253
volume, 253
VWAP, 253
z-score analysis, 251
scientific method, 235e245
I-Star model, 99, 197, 380, 407e413,
520
broker cost estimates, 414t
regression analysis using All Broker
MI Data, 415t
trading cost estimates, 409te410t
Idiosyncratic risk. See Stock-specific
risk
Imbalance, 252e253
size, 249
issues, 250
Implementation, 5
goal, 58e59
types to investors, 19e20
Implementation shortfall (IS), 67e74
algorithm, 33
complete execution, 69
formulation, 74e75
trading cost/arrival cost, 74e75
opportunity cost, 70e71
Implied volatility, 269
In-house market impact models,
473e474
Independent samples, 89e91
ManneWhitney U test, 89e91
Independent sampling approach, 85
Index
arrival, 81
index-adjusted cost, 81
manager. See Passive manager
model, 292e293, 296
multi-index models, 293
single-index model, 292e293
reconstitution, 12
research, 15
Indication of interests (IOIs), 52e53
Industry buzz words, 223
Industry event, 7
Inequality constraint matrix, 374
Information
content, 6e7
information-based rebalance, 12e13
information-based trade, 6
information-less investing, 9
leakage, 25
set, 58
Initial parameter value, 524
Input data, 176
Instantaneous impact equation,
121e122
 Index 581

Institutional sales. See Equity/ Liabilities, 14 M

equitiesdsales Likelihood function, 203, 278 Machine learning, 221, 223e224,
Interior point algorithm, 523 maximize log, 203e204 519e520, 528e531
Interval VWAP, 77 Limit order, 44 classification analysis,
Intraday analysis, 49, 66, 546e547, 562 strategies, 54 228e229
Intraday trading Limit order model (LOM), 20, 48, 563 examples, 225e226
pattern, 317e318 Linear regression models, 152, 152f, neural networks, 231,
profiles, 39e42 156e166, 176, 198. 530e531
Intraday volume profile, 320 See also Nonlinear regression errors, 531, 539e540
Inverted pricing models. See models structure, 530f, 539
Taker-maker pricing model data, 160t performance results,
Investment fractional regression model, 172e173 540e541
capacity, 470 matrix techniques, 167e169 regression, 229e231
cycle, 5, 6f multiple, 161e164 training experiment,
objectives, 5e6, 9, 503 polynomial regression model, 171e172 531e540
strategies, 9e15 regression metrics, 154e156 compiling stock and basket data
styles, 7e9 requirements, 154 statistics, 532e534
and trading theories, 441e445 simple, 156e158 generating simulated trade baskets,
cost-adjusted riskereturn values, true, 156 532
442t Linear shape of market impact function, initial parameter values for NNET,
execution strategy, 443e445 114 536
Investment-related cost. See Liquidation, 7 multiperiod trade schedule
Delay-related component costs, 13, 431e432, 471, 481e484 optimization problem, 534
Investor(s), 83, 447 analysis, 564 PCA, 536
maximizing utility, 438e439, 439f Liquidity, 482 stepwise regression analysis,
types, 28 costs analysis, 546 536e538
IOIs. See Indication of interests (IOIs) demand cost component, 61 training NNET, 535
IS. See Implementation shortfall (IS) factor, 548 X-input variables, 533e534
liquidity-based investing, 9 Y-output variable, 534
J liquidity-based trade, 7 types, 224e225
Jackknife sampling techniques, risk, 62 Macro level strategies, 47e48
212e219 trading strategies, 52e53 Macro strategy, 20
nonlinear regression data, 215te216t “Liquidity Seeking” algorithms, 34e35 Macroeconomic factor models,
Jacobian matrix, 205 Log regression model, 169e171 293e296
Log transformed model, 412 Macrotrading rules, 54
K Log-likelihood function, 203e204, 278
Log-linear regression model, 152, 152f,
Maker-taker pricing model, 45
k-means algorithm, 225 ManneWhitney U test, 89e91
200 Market
Kissell Research Group tick rule (KRG
Log-linear transformation, 171 activity IS, 73
tick rule), 246, 560
Log-normal distribution, 141 cap, 241
KolmogoroveSmirnov goodness of fit,
Log-returns, 270 cost-adjusted z-score, 83
94e95
Log-transformation, 169e170 driven data, 294
Kurtosis, 136, 175, 221e222
Logistic distribution, 146e147 makers, 24, 28
Logistic regression, 191e194, 228 market-adjusted performance
L analysis, 192 measure, 80e81
“Lack of knowledge” distribution. See model, 200e201 mispricing, 440e441
Triangular distribution Logit model, 176, 178e179 trade, 10e11
Lagrange multipliers, 437 comparison of, 181f, 191e194 neutral strategy, 12
Large cap stocks, 37e38, 240 example, 190 order, 44
volume, 306e309 Logit regression, 228 outlook, 12
Lee and Ready tick rule, 246e247 LOM. See Limit order model (LOM) pundits, 28e29
Leptokurtic distributions, 136 Long-term alpha, 10 risk, 292
582 Index
Market impact (MI), 61e63, 353, 439,
454, 513, 520, 547
cost, 459e460, 470, 483
expression, 363, 380e382, 384e387,
388t
for basket of stock, 382
comparison, 388e395, 389f
ETF, 391e392
forecasting covariance, 390e391
I-Star, 380
portfolio trade cost objective func-
tion, 394e395
for single stock order, 380e382
single stock trade cost objective
function, 393
factor scores, 469, 508e510
analysis, 510e512
current state, 510
formula, 434
parameters, 353t, 418
portfolio optimization model, 425
price trajectories, 108e109
simulation, 490e494
scenario, 491e494
summary, 550e551
Market impact models, 99e115,
301e303
derivation of models, 115e120
AC market impact model, 115e120
I-Star market impact model, 120
developing, 109e110
essential properties, 110e111
graphical illustrations, 101
market impact price trajectories,
108e109
price trajectory, 101e102
supplyedemand equilibrium,
102e105, 103f
temporary decay formulation, 108
temporary impact decay function,
105e107
model formulation, 120e128
comparison of approaches, 128
cost allocation method, 123e125
derivation of model, 122e123
I* formulation, 126e128
I-Star model, 121e122, 126e128
market impact equation, 122
permanent market impact, 100
shape of market impact function,
112e113
concave shape, 114e115
convex shape, 114 Money
linear shape, 114 management, 23e24
temporary market impact, 100 managers, 487e488
Marketable limit order, 44 Monte Carlo Techniques, 210e211,
Markowitz ETF, 436 449e450
MATLAB functions, 549 Month over month (MOM), 303e305
Matrix notation, 289e292 Moving median daily volume (MDV),
Matrix techniques, 167e169 309e310, 312
compute standard errors of b, 168 MSE. See Mean sum of square errors
estimate parameters, 167 (MSE)
F-statistic, 169 MSR. See Mean square regression (MSR)
log regression model, 169e171 Multi-asset class investing, 495e498
log-linear transformation, 171 allocation schedule, 500t
R2 statistic, 169 in beta exposure and other factors, 495
Maximum likelihood estimation tech- equities, 495e496
niques (MLE techniques), 180, ETF, 496e497
183, 190, 198, 202e204, 275 example, 495e498
determining parameters via, 277e280 futures, 497e498
likelihood function, 203 Multi-asset trading costs, 498e506,
Maximum trading opportunity, 398e399 507t. See also Trading costs
MDV. See Moving median daily bonds, 505
volume (MDV) commodities, 505
Mean, 135, 221e222 currency, 506
mean-variance optimization, 350, 441 equities, 504
trading cost component, 67 equity market trading cost analysis,
of probability model, 182 502t
Mean square regression (MSR), 155 ETF, 504
Mean sum of square errors (MSE), 155 futures, 504e505
Median, 135 global equity markets, 500e501
test, 91e92 multi-asset classes, 501e506
MI. See Market impact (MI) observations, 504
Micro strategy, 20 room for improvement, 506
Microadaptation tactics, 54 Multi-index model, 292e293
Microlevel decisions, 48 Multiperiod
Microorder placement strategies, 50 optimization problem, 449e450
Mind-maps, 221e222 trade schedule optimization problem,
Minimum trading risk quantity, 397 520e523
Mispricing, 10e11 setting up problem, 520e521
liquidity, 503 trader’s dilemma objective function,
MLE techniques. See Maximum likeli- 521e523
hood estimation techniques trade schedule optimization solution
(MLE techniques) times, 519
Mode, 135 Multiple linear regression models,
Model 161e164. See also Simple linear
driven, 12 regression models
inputs, 376 calculate model performance statistics,
model-driven rebalance, 12e13 164
performance measurement, 202, estimate model parameters, 162e164
278e279 example, 165e166
MOM. See Month over month (MOM) output, 166te167t
Momentum. See Price appreciation test for statistical significance of
Momentum cost, 339 factors, 164

N results, 217t
Names in portfolio optimization, 431
National Best Bid and Offer (NBBO),
20e21
Natural language processing, 231
NBBO. See National Best Bid and Offer
(NBBO)
Neural network model approach (NNET
model approach), 413e416,
416f, 519. See also I-star model
approach
Neural networks, 231, 530e531, 530f,
542t
errors, 531, 539e540
initial parameter values for, 536
structure, 539
training, 535
Newton’s method, 525e526
NewtoneRaphson method. See
Newton’s method
NLP. See Nonlinear programming
(NLP)
NNET model approach. See Neural
network model approach (NNET
model approach)
No net investment, 50
No short sales, 355
Non-OLS. See Nonlinear least squares
techniques (Non-OLS)
Nonelectronic trading, 28
Nonlinear least squares regression tech-
niques, 255
Nonlinear least squares techniques
(Non-OLS), 198, 202, 204e205
error term, 204
loss functionesum of square errors, 205
minimize sum of, 205
Nonlinear model, 180, 201
Nonlinear model, 201
Nonlinear optimization
convergence, 523e527
examples, 526e527
Newton’s method, 525e526
formulation, 360
Nonlinear programming (NLP), 361
Nonlinear regression models, 197, 202.
See also Linear regression
models
estimating parameters, 202e204
evaluate model performance, 206
nonlinear formulation, 201e202
notes on sampling in, 218e219, 218f
sampling techniques, 207e208
Nonparametric tests, 85e86
Nonrandom sampling techniques, 208
Nontraditional data. See Traditional data
Nontransparent transaction costs. See
Hidden transaction costs
Normal distribution, 129
standard, 133t
O PCA. See Principal component analysis
Objective function difficulty, 357
OLS technique. See Ordinary least
squares technique (OLS
technique)
One-sided optimization problem, 354
Opportunity
cost, 62e63, 70e71
opportunity-related delay cost, 73
Optimal asset allocation problem,
449e450
Optimal portfolios, 437, 439
Optimal strategy, 440e441
Optimal Trading Strategies, 32, 78e79
Optimization, 445, 564, 567
analysis, 551, 552f
constraints, 430e431
formulation, 354e358
constraint description, 355e358
objective function difficulty, 357
objective function simplification, 358
solution time, 368t
Order
data, 247
priority, 46
types, 44
Ordinary least squares technique (OLS
technique), 157, 162, 173, 180
estimation techniques, 217
regression analysis, 289, 411e412, 419
“Out-of-sample” test, 236
Outcome
events, 224
states, 228
variable, 176
Outlier analysis, 278e280
P reoptimization, 371e372
Paired observation approach, 84e85
Paired samples, 86
Paper return, 68
Parameter estimation error, 380
Index 583
Participation-weighted price (PWP), 75,
77e78
Passive algorithm, 4, 31
Passive fund, 9
Passive in-money (PIM), 338, 344e345
Passive manager, 9
Passive pool algorithms, 336
Passive strategy, 444
Path-dependent approach, 116
Payments, 14
(PCA)
pdf. See Probability density function
(pdf)
Percentage of volume (POV), 77e78,
112e113, 124, 234, 301e302,
336, 375e377, 519, 523,
550e551
rate, 201e202, 249, 255, 407e408,
486
strategies, 32
to trade rate, comparison of, 378
Performance measure, 365
Permanent market impact, 100
PIM. See Passive in-money (PIM)
PIM tactics. See Project Information
Model tactics (PIM tactics)
Pinging, 52e53
Platykurtic distributions, 136
pmf. See Probability mass function
(pmf)
PnL. See Profit and loss (PnL)
Poisson distribution, 150
Polynomial regression model, 152, 152f,
171e172, 198e199
Portfolio, 11e12
algorithms. See Basketdalgorithms
attribution, 5
optimizers, 416e417
portfolio-trading desk. See Programd
trading desk
rebalance, 11
risk, 462
trade cost objective function, 394e395
Portfolio adaptation tactics, 368e374
AIM tactics, 368e371, 370f
PIM tactics, 368e371, 370f
Portfolio construction, 5
existing models for, 472e475
current state of vendor market
impact models, 473e475
584 Index
Portfolio construction (Continued )
with transaction cost analysis, 429,
449e456
appropriate level of risk aversion,
447e448
best execution frontier, 448e449
cost-adjusted frontier, 445e447
example, 456e466
findings, 464e466
investment and trading theories,
441e445
portfolio management process,
437e439
in portfolio optimization and con-
straints, 430e436
portfolio optimization and stock
data, 457t
quest for best execution frontier,
451e456
trading decision process, 439e441
Portfolio management, 437e439,
484e487, 567
ETF with and without short positions,
437e438, 438f
maximizing investor utility, 438e439,
439f
Portfolio managers, 5e7, 9e10, 12e13,
57, 419, 421e423, 431,
473e474, 488, 495, 510, 544,
546, 560e561, 564
decision, 439
and traders, 406, 433
Portfolio optimization, 416e429,
449e450, 470
comparison of optimization techniques,
364e368, 366t
optimization solution time, 368t
solving portfolio objective problem,
365e368
and constraints, 430e433
deriving portfolio optimization market
impact models, 419e420
portfolio managers, 419
QP approach, 358e360
residual schedule exponential,
361e362
share quantity regression model,
420e424, 422te423t
trade schedule exponential, 360e361
trade value regression model, 425e428,
426te427t
trading rate parameter, 362e364
transaction costs in, 434e436
Portfolio risk management, 395e403
maximum trading opportunity,
398e399
minimum trading risk quantity, 397
program-block decomposition,
400e403
residual risk curve, 395e396
values, 400
Posttrade analysis, 49e50, 66, 97, 455,
547, 555e558, 562, 565
POV. See Percentage of volume (POV)
Power function, 176, 191f,
194f
grouped limit order data, 193t
limit order data, 187te189t
logistic regression summary results,
194t
model, 177, 412
Predictive analytics, 223e224
Predictive modeling. See Predictive
analytics
Pretrade
analysis, 49, 65, 545, 562, 565
benchmark, 80
cost calculations, 473
impact models, 473
market impact parameters, 562
of pretrade approach, 247, 406e416,
475e478, 513
applications, 476
examples, 476e478
I-star model approach, 407e413
NNET model approach, 413e416,
416f
Price
appreciation, 61, 353, 512, 548
discovery, 27
evolution, 512
price-based algorithms, 34e35
price-size priority, 46
price-time models, 46
return, 512
trajectory, 101e102
trend, 512
volatility, 379
Principal bid, 16e17, 19e20, 46e47
Principal component analysis (PCA),
295, 536. See also Transaction
cost analysis (TCA)
Principal trade. See Principal bid
Probability
in algorithmic trading, 129
distributions, 130e136
continuous, 132e135
descriptive statistics, 135e136
discrete, 131e132
functions, 136
Probability density function (pdf),
130e131
Probability mass function (pmf), 130
Probability models, 175, 186
comparison of linear regression model
to, 177, 178f
developing, 175e184
grouping data, 182
likelihood function based on actual
outcome results, 183e184
logit model, 178e179
outcome data, 180e182
mean, 182
model formulation, 182
variance, 182
power function model, 177
probit model, 179e180
comparison of, 181f, 191e194
solving binary output models, 182
solving probability output models,
184e185
examples, 186e190
power function, 191
specifying probability function,
182e183
Profit and loss (PnL), 67
algorithms, 24
Profit seeking algorithms, 3e4
Program, 11e12
program-block decomposition,
400e403, 402f
sales trader, 18e19
trading desk, 16e17
Project Information Model tactics (PIM
tactics), 368e371, 370f
PWP. See Participation-weighted price
(PWP)
Python functions, 549
Q
Quadratic programming (QP)
approach, 358e360
formulation, 350
subproblem, 523
trade schedule optimization technique,
372e373
 Index 585

Quant trading/statistical arbitrage, 50, 52 Registered investment advisors (RIAs), RMSE. See Root mean square error
Quantitative analysis with TCA. 28e29 (RMSE)
See also Transaction cost anal- Regression, 229e231 RMZSE. See Root mean Z-Score
ysis (TCA) analysis, 151, 251, 529 squared error (RMZSE)
alpha capture program, 470, 512e518 based supervised learning, 225 Robo” trading. See Algorithmic trading
backtesting, 470e471 fractional, 199 Robo-investing, 223
strategies, 487e490 metrics, 154e156 Robotics, 223
cost curves, 469e470 linear, 198 Roll cost, 504e505
existing models for portfolio construc- log-linear, 200 Root mean square error (RMSE),
tion, 472e475 logistic, 200e201 278e279
investment capacity, 470 models, 177, 198e201 Root mean Z-Score squared error
liquidation cost, 471 nonlinear, 201 (RMZSE), 278e279
market impact polynomial, 198e199 RPM. See Relative performance mea-
factor scores, 469, 508e510 Regression sum of squares (SSR), 155 sure (RPM)
simulation, 490e494 Reinforcement learning, 223, 225
multi-asset class investing, 495e498 Relative performance measure (RPM), S
multi-asset trading costs, 498e506 75, 78e80 Sales function, 17e18
portfolio optimization, 470 Remaining daily volume (RDV), Sampling techniques, 207e208
pretrade of pretrades, 475e478 321e322 random, 208e209
quantitative overlays, 469 Research, 564e565 with replacement, 209
sensitivity analysis, 471 data of investment analysis, 15e16 without replacement, 210
trading costs, 478e487 function, 17e18 Scientific method, 233,
Quantitative analysts, 18, 561 Research sales. See Equity sales 235e245
Quantitative asset managers (Asset Residual risk curve, 395e396, 396f, asking question, 235
Mgmt-Quant), 30 399f communicating experimental results,
Quantitative fund, 8 Residual schedule, 355 236e245
Quantitative managers, 8, 12, 488 exponential, 361e362, 522 solution technique, 237e245
Quantitative portfolio managers, 16e17, Residual size bounds, 356 constructing hypothesis, 235e236
437 Residual trade schedule, 519 researching problem, 235
Quantitative process, 429e430 Retail investors, 28 testing hypothesis, 236
Quantitative research, 15 Returns, 274, 452e453 Screening techniques, 484e487
Quest for best execution frontier, Revenue pricing models, 45e46 Second wave of portfolio optimization,
451e456 Reverse engineering broker models, 434
return, 452e453 405e406 Self-financing, 356
risk, 453e456 portfolio optimization, 416e428 Sell-initiated trade, 246
Quicker trading, 124 pre-trade of pre-trades, 406e416 Sell-side firms, 520
RIAs. See Registered investment advi- Semisupervised learning, 225,
R sors (RIAs) 528e529
R2 Risk, 453e456 Sensitivity analysis, 257e261, 349, 471,
goodness of fit, 159, 164 aversion, 365, 455 545, 552f
statistic, 169, 239 appropriate level of, 447e448 Sequential quadratic programming, 523
R2000 index, 407e408 parameter, 33e34 Shadow liquidity, 503
Random forests, 228 factor, 292 Share quantity regression model,
Random sampling techniques, 208e209 hedging, 503 420e424, 422te423t,
Random variables, 129e130 idiosyncratic risk component, 292 469e470
Range, 273 management, 13, 356e357, 431 Sharpe ratio of trade, 447e448
RDV. See Remaining daily volume trade, 13 Short trading horizons, 50
(RDV) market, 292 Short-term alpha, 10
Realized volatility, 269 reduction, 13 Shrinking portfolio, 355
Rebates, 60 stock specific, 292 Side indicator function, 116
rebate/liquidity trading, 50, 52e54 systematic risk component, 292 Side of imbalance, 253
Redemption, 13 Risk bid. See Principal bid Sign test, 86e87
586 Index

Simple linear regression models, Steepest descent, 523 TR. See Timing risk (TR)
156e158. See also Multiple Stepwise regression analysis, 536e538 Trade, 6
linear regression models Stock cost distribution graph, 552e553
example, 159e161 stock-specific list, 11e13
model parameters estimation, 157e158 error analysis, 265e267 rate, 234, 519, 534
model performance statistics risk, 111, 292 bounds, 356
evaluation, 158 universe, 252 schedule, 32e33, 234, 356, 378
output, 161t volatility, 249, 482 exponential, 360e361, 522
test for statistical significance of Stock-specific risk, 292 optimization process, 349, 447e448
factors, 159 Structured data, 222e223 size bounds, 356
Simple mean. See Arithmetic mean Student’s t-distribution, 139e140 strategy, 519
Simply trading PnL. See Trading price Suboptimal Markowitzian portfolio, 448 trajectory, 32e33
performance Sum of squared X, 155 value regression model, 425e428,
Single factor regression model, 246 Sum of squared XY, 156 426te427t
Single optimal trading strategy, 445 Sum of squared Y (SSY), 156 volume, 503
Single stock, 16 Supervised learning, 224e225, Trade cost analysis (TCA), 405e406
algorithms, 31 528e529 TradeMetrics
market impact Supplyedemand equilibrium, 102e105, broker pretrade estimates, 555f
analysis, 551 103f single stock
simulation, 494, 494f Systematic risk component, 292 cost curves, 554f
trade cost objective function, 393 market impact analysis, 551f
Single-index model, 292e293 T trade algorithm, 550e551, 550f
Size of imbalance, 254 t-distribution. See Student’s Traders, 25, 57, 544, 560
Skewness, 136, 175, 221e222 t-distribution dilemma, 63, 351e352
Slicing strategy, 349 T-test, 159, 164e165 objective function, 521e523
Small cap stocks, 38e39, 240, 308 Tag-clouds, 221e222 variables, 351e352
Smart order router/routing (SOR), Taker-maker pricing model, 45 Trading
20e21, 48e49, 54, 564 Taxes, 59 algorithm
Solution technique, 237e245 TCA. See Trade cost analysis (TCA); classifications, 3e4
SOR. See Smart order router/routing Transaction cost analysis (TCA) styles, 4
(SOR) Temporary decay formulation, 108 characteristics, 479t
SP500 index, 292, 407e408 Temporary impact decay function, decisions, 432
Specified tolerance value, 523e524 105e107, 107t optimal strategy, 440e441
Speculation, 503 Temporary market impact, 99e100 process, 439e441
Spreads, 60, 111, 241 cost, 123 desks, 16
SSE. See Error sum of squares (SSE) Third wave of portfolio optimization, floor function, 18e19
SSR. See Regression sum of squares (SSR) 435e436 goals, 330e337
Standard deviation, 135, 221e222 Third-party balance tradeoff between cost and
Standard error of regression model, consultants, 97 risk, 333
159, 164 TCA systems, 544 minimizing cost, 330
Standard normal distribution, 138 TIC data. See Treasury international minimizing cost with risk constraint,
Starting solution, 524 capital data (TIC data) 331
Static trade schedule algorithm, 86 Time period, 252 minimizing risk with cost constraint,
Static trading parameters, 84e85 Time weighted average price algorithm 333
Statistical/statistics (TWAP algorithm), 32 price improvement, 334
in algorithmic trading, 129 Timing risk (TR), 62, 354, 379, 392, liquidity, 503
analysis, 262e265 439, 442e443, 454, 520, 548 price performance, 75
error analysis, 262e265 for basket of stock, 387e388 rate, 377, 522
factor models, 295e299 equation, 382e388 comparison of POV rate to, 378
factor selection, 297e299 expression, 363e364 variable, 377
models, 52 Top down credit strategy approach, 14 rate parameter, 362e364
tests, 95 Total sum of squares, 155 market impact expression, 363

timing risk expression, 363e364
risk components, 379e380
stability, 111
strategy, 376e378, 378f
comparison of POV rate to trade
rate, 378
percentage of volume, 377
trade schedule, 378
time, 378e379
trading-related transaction costs, 63
venue classification
controversies, 43e44
dark pool, 42e43
displayed market, 42
venues charge, 60
Trading cost(s), 478e487
acquisition and liquidation costs,
481e484
effect, 452
equations, 375e376
model inputs, 376
portfolio management, 484e487
reformulating, 380e382
market impact expression, 380e382
standard error term, 67
trading cost/arrival cost, 74e75
Traditional
asset managers, 28
data, 222
statistical arbitrage trading, 52
Transaction cost analysis (TCA),
15e16, 18e19, 57, 65e67, 436,
469, 543
analytical tools, 543
cost vs. PnL, 67
Excel and Python functions, 549
functions, 545e547
library, 559e561
Kissell Research TCA library
functions, 566t
TCA functions, 565e567
transaction cost analysis using,
561e567
MATLAB functions, 549
measuring/forecasting, 66e67
optimization, 548
portfolio optimization with, 461e462,
463t
report examples, 550e558
Transaction costs, 57e58
analysts, 18
Index 587
categorization, 65 rebates, 60
chi-square goodness of fit, 93e94 spreads, 60
classification, 62e63, 64f taxes, 59
comparing algorithms, 84e89 timing risk, 62
nonparametric tests, 85e86 Transition management, 565
paired samples, 86 Transparency, 25
sign test, 86e87 Transparent costs. See Visible costs
Wilcoxon signed rank test, 87e89 Treasury international capital data
distribution analysis, 92 (TIC data), 77
equations, 352e354 Triangular distribution, 148
market impact, 353 True linear regression model, 156
market impact parameters, 353t Trust region reflective algorithm, 523
one-sided optimization problem, 354 Turnover, 253
price appreciation, 353 TWAP algorithm. See Time weighted
timing risk, 354 average price algorithm
evaluating performance, 75e84 (TWAP algorithm)
adaptation tactic, 83e84
benchmark price performance, U
75e76 Unbundled transaction cost components,
index-adjusted performance metric, 59e62
80e81 Uniform distribution, 142
market cost-adjusted z-score, 83 Unique covariance parameters, 285
pretrade benchmark, 80 Unsupervised learning, 224,
PWP benchmark, 77e78 528e529
RPM, 78e80
trading price performance, 75 V
VWAP benchmark, 76e77 Value-at-risk (VaR), 269e270, 272
z-score evaluation metric, 81e83 Variable(s), 351e352, 548
experimental design, 95e96 cost components, 65
balanced data sets, 96 relationships, 548e549
data ties, 96 Variance, 270
proper categorization, 96 of probability model, 182
proper statistical tests, 95 Vendors, 405, 407e408, 418
small sample size, 95 current state of vendor market impact
implementation shortfall, 67e74 models, 473e475
formulation, 74e75 Visible costs, 65
independent samples, 89e91 Volatility, 112e113, 269, 271
KolmogoroveSmirnov goodness of fit, forecasting stock, 274e280
94e95 historical, 269
median test, 91e92 implied, 269, 272e273
model, 547e549 beta, 273
posttrade analysis, 97 range, 273
pyramid, 64f measures, 270e272
unbundled transaction cost components, average return, 270
59e62, 64t correlation, 271
commission, 59 covariance, 271
delay cost, 60e61 dispersion, 271e272
fees, 59 log-returns, 270
market impact, 61e62 VaR, 272
opportunity cost, 62 variance, 270
price appreciation, 61 realized, 269
588 Index

Volume, 253
forecasting techniques, 301
ADV, 303e306
market impact model, 301e303
observations over 19-year period,
306e308
observations over 3-year period,
308e309
and stock price correlation, 309
variance, 379
Volume-weighted average price
(VWAP), 58, 246, 253, 550e551
algorithm, 32
benchmark, 76e77
frontier, 447
strategy, 389, 432e433, 440,
445, 477, 486
W Z
Wagner’s IS. See Expanded IS
“What-if” analysis, 473e474
Wilcoxon signed rank test, 87e89
WilcoxoneManneWhitney ranks test, 95
Working order of algorithm, 4, 31
Y
Yield curve strategy, 14
Z-score
analysis, 251
evaluation metric, 81e83