High Frequency Trading Report

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Trading Report

Strategy Chosen
Our strategy is consisted of two parts: when the market is neutral without obvious trends, we play like the role of market maker; on the contrary, we put our bet on the trend. At first, we calculate the weighted average quantity from the order book, says 1st to 4th layer, for both sides. If bid quantity is larger than 2.5 times of ask, we believe that bulls prevail and this trend will be continued in a phase. Thus we place a market order to buy, expecting to earn profit from the following bullish trend. While ask quantity is much larger, and then we will take the short position. In case of no trend exists, we do not bet on any side but trade the spread. By sending buy and sell orders simultaneously, respectively with limit prices that higher than the best bid and lower than the best ask, we earn profit between the bid and ask quotes of the market. For an ideal example, assume that there is a stock now traded with bid-ask spread 100-103. Our strategy place a 101 buy order and a 102 sell order at the same time. Then we expect two sides orders are all executed, which immediately brings a profit of 1 for every pair trade. We provide the market with narrower spread and liquidity, as if we were a market maker, who take advantage of quote spreads. In addition, if all the orders are exactly executed, then our net position will be zero, meaning this strategy bearing little risk in this case. The reason why we adopt this strategy is that we desire to find a way to earn a relative stable profit, regardless the market condition. A vague, inactive market should benefit us by supply a greater quote spread. On the other hand, we catch trends in an active market, thus both types of market are favorable for our trading strategy.

Parameters Chosen for Trading
1. Instrument
The instrument chosen is DAX future (Product ID: FDXM2 1206) with final settlement date at 2012/6/13. We think index...
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