ASSESSING THE PERFORMANCE OF AN INTER-MARKET TRADING STRATEGY IN THE LOW AND HIGH FREQUENCY DOMAIN BASED ON HISTORIC DATA USING MACHINE LEARNING

Lead Research Organisation: Imperial College London
Department Name: Dept of Computing

Abstract

An interesting application and expansion of the deep learning concepts should be pioneered in PhD research by applying them to high frequency order book data, namely to use machine learning tools to derive a high frequency trading mechanism. As researched in coursework during my MSc in Algorithmic Trading, I evaluated that NVWAP (Notional Volume Weighted Average Price) curves are governed by four statistics, namely steepening/flattening and contraction/expansion. Contraction/expansion of NVWAP curves is quantified by computing the change in total volume on both, the bid and ask-side of the limit order book. This concept should be taken as input and further developed by machine learning tools to derive whether an automated trading system could operate profitably in practice. To do this, the data is supposed to be separated in various chunks serving as input for the deep neural net. Its findings should then be applied on trading real time markets and evaluated whether a profitable operation is achievable. To appreciate inter-market relations, two or more correlated assets can be investigated simultaneously to derive trading decisions.

The science of machine learning is quite new compared to the concepts of finance and investments. Given recent developments in terms of the amount of data recorded and being accessible, and modern computing technology, it is worthwhile to search for synergy between the two subjects and scan the data for patterns that have not been obvious for market participants before. Clearly, this is a challenging task since powerful players such as large investment banks, but also institutional and professional investors aim at doing the same. Recent and major advances in combining advanced computational tools and finance further motivate to do so. There is no magic in machine learning technique; however, it is capable of learning patterns of data from the past to apply its findings in future. Grounded on the general definition of machine learning to be a computer program learning from experience E with respect to some class of tasks T and performance measure P, if its performance at tasks in T, as measured by P, improves with experience E, the task will be investigated.

One of the most recent tools in machine learning are deep neural nets (DNN). A deep neural network (DNN) is an artificial neural network with multiple hidden layers of units between the input and output layers. For example, one can built deep neural networks for modeling mortgage delinquency and prepayment risk using a dataset of over 120 million prime and subprime mortgages and simulate mortgage 17 portfolios for risk analysis purposes. It was even found that some of the classical theory in finance such as the efficient market hypothesis might be challenged by deep learning.

Yet another motivation is to apply deep learning to discover trading strategies not yet executed in the markets. To do so, the historic data was split up into two constituent parts. Firstly, 80% of the historic data were defined to be test data, i.e. data on which the market structure was investigated. The remaining 20% were training data, i.e. data the neural net has not seen before. In other words, the learning outcomes of 80% of the data were now applied to the remaining 20% of the data with the result that several financial instruments could indeed be profitably traded.

Publications

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Studentship Projects

Project Reference Relationship Related To Start End Student Name
ES/P000703/1 01/10/2017 30/09/2027
2118751 Studentship ES/P000703/1 01/10/2018 30/09/2022 Benjamin Scharpf