Unintuitive thesis results

[ronin]

> In case 1, you get filled for your full quantity.



This reminds me of those sales pitches for carry. If the yen goes down, you make money in dollars. If the yen goes up, you make money in the yen.



Except, you don't. Both 1 and 2 lose money.

[trialanderror]

@ronin I should have been more clear in my first post. What I call "aggressive orders" are just reconstructed from the ITCH feed, I do not observe the actual aggressive orders. I got some help from @EspressoLover with it here: https://nuclearphynance.com/Show%20Post.aspx?PostIDKey=196840.



Let me make an example of the reconstruction logic for large orders and medium orders, messages in () are within 1 ns of each other.



Large order (L):



ITCH message feed: [(EEA)AAAD(EEEA)DDUAE]

Reconstructed "aggressive order" feed: [LAAADLDDUAE]

Conditional prob to follow L order: 50% "A"-message, 50% "D"-message



Medium order (M): (assume that the "E" messages in the () reflect an "aggressive order" on the bid side, and that the combined volume of the "E"-messages = the ask side volume)



ITCH messages: [D(EE)DAADED(EE)UA(EEE)PA]

Reconstructed "aggressive order" feed: [DMDAADEDMUAMPA]

Conditional prob to follow M order: 1/3% "D"-message, 1/3% "U"-message, 1/3% "P"-message



@gaj Not sure how to check my hypothesis, I can simply observe that following the "L" event, there is a very low prob of an "A" message, which is strange considering the other results, and what prompted my gung-ho explanation suggested earlier.



I hope this makes sense.

[gaj]

@ronin: Not sure I'm on the same page. Why would case 2 lose money? And if case 1 loses money, so does the IOC. Besides, an aggressive order is expected to lose money in the short term anyway.

[ronin]

> @ronin: Not sure I'm on the same page. Why would case 2 lose money? And if case 1 loses money, so does the IOC. Besides, an aggressive order is expected to lose money in the short term anyway.





The only reason you would be aggressing is because you are short - either in absolute terms (if you are market making), or relative to your benchmark (if you are running vwap).



In case 2, your remaning quantity on the limit order is bidding the market higher up than an IOC. That hurts your short.



In case 1, you aggressed too early and lost the spread.



There is no scenario in which this makes you money. Other than, you are really long and you are deliberately trying to bid the market up. And we all now how that one ends.

[gaj]

if your IOC is not fully filled, how would you execute the remaining quantity?

[EspressoLover]

Maybe, I'm misunderstanding the conversation. But there are economic reasons to cross the spread, besides just inventory effects. Some participants have alphas, and sometimes those alphas both exceed the spread cost and decay too fast to be monetized passively. A good example is after the index futures tick up, it likely makes sense to sweep the touch on cash equities.



I also think there are also economic reasons to use IOC. Resting liquidity, even on new level formation, is subject to adverse selection costs in a way that pure IOC isn't. If I'm trading off a spurious alpha signal, others are more likely to quickly swipe my resting limit order. This goes double when you're not operating under latency supremacy, because you're probably arriving at Nth place instead of at the front of the queue.

[gaj]

Adverse selection on remaining liquidity is a valid point (and I think ronin might be alluding to a vaguely similar point). The argument is basically: if somebody hit my remaining bid in a newly formed level, he is probably informed. This may or may not be true for different markets and depends on how good my alpha is.



Some people use IOC just because of simplicity. They don't want to manage the lifetime of the order, handle weird order states, etc.

[Kitno]

@ronin yeh but gold goes up in both inflation and deflation! Applause

[ronin]

> if your IOC is not fully filled, how would you execute the remaining quantity?



@gaj,

Say the market is 99/100. You swiped 100, the market is 99/101 and you are still not full.

Would you prefer to continue buying in a market that is 99/101, or in a market that is 100/101?



> But there are economic reasons to cross the spread, besides just inventory effects.



@el,

Yeah, I was probably being a bit too succint there. That was meant to be included in "short relative to the benchmark". In my world (when I was in that world), alpha saying go long creates a benchmark for how long you need to be and when. You are short relative to the benchmark, and you make your decisions on what's the best way to hit the benchmark in the given market. Decoupling alpha from execution was a thing then.



> @ronin yeh but gold goes up in both inflation and deflation!



@kitno,

Gold vs pork bellies is where it's at. I'll never forgive them for delisting pork bellies. Bastards.

[gaj]

> Would you prefer to continue buying in a market that is 99/101, or in a market that is 100/101?



Fair point. The case I was thinking of was a liquid, thick market that's always one tick wide. 99/101 will either go to 99/100 or 100/101 in the next millisecond. If it goes back to 99/100, you should want to buy your remaining quantity again at 100, since nothing has changed from the last millisecond (unless you're an HFT guy, which goes back to EL's point). If it goes up to 100/101 you'd be happy to have good priority at 100, and you could always cancel it if you change your mind.



> Decoupling alpha from execution was a thing then.



All serious traders decouple alpha from execution. But in HFT world, alpha opportunities are usually instantaneous, so it doesn't make sense to execute with a schedule.