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Between the Bells

Traders Magazine Online News, July 18, 2018

Allison Bishop

Even data scientists need ways to unwind. When I started doing quantitative research at IEX about three years ago, I became obsessed with market microstructure. Maybe a little too obsessed. I caught myself complaining about the low sock liquidity levels of my wardrobe and chiding my faster-eating friends for “co-locating with the ketchup.” I needed a hobby.

So I started learning how to box.

Learning to box is a slow process. It takes years of careful work, building precisely choreographed movements into muscle memory until they become instinctive, slowly adding complexity and reducing reaction times. To an outside observer, a boxing match may look chaotic and unpredictable?—?a lot of seemingly pointless shuffling punctuated by small explosions of activity.

The market for U.S. equities looks a bit like this at a millisecond scale: quotes holding steady, then shuffling around, then a small flurry of trading activity, then shuffling, then steady, etc. In any given day, there are over 8,000 stocks trading over the course of 6.5 hours, which is 23,400,000 milliseconds. Multiply this by 8,000, and we get over 180,000,000,000 millisecond units of market (in)activity, indexed by stock. Over the course of a day, the National Best Bid for some stock ticks down (the highest price advertised by a buyer in the market decreases) or the National Best Offer for some stock ticks up (the lowest price advertised by a seller in the market increases) approximately 10,000,000 times. While that is a huge number of price changes, it actually means that less than 1 in 10,000 of our millisecond/stock units contain a price tick. Additionally, the ones that do are not evenly distributed?—?about 40% of price ticks happen within one millisecond of another price change. At this millisecond scale, the market is a boxing match?—?with lots of shuffling, quick sequences of punches, and comparatively long rests between rounds.

One of the first things I learned about boxing was how to watch my opponent’s shoulders. If a punch could land in the same instant of its conception, it would be impossible to anticipate. But a powerful right cross that begins as a glint in your opponent’s eye becomes a movement in the shoulder before it lands as a punch. If you are watching the shoulders, you’ll know what’s coming, and you can prepare and respond. Of course, the process isn’t perfect. There are variations in the movements and timing, and deliberate fakes that can be confusing.

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