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Multi-scale capability: A better approach to performance measurement for algorithmic trading

Author

Listed:
  • Cooper, Ricky

    (Stuart School of Business)

  • Ong, Michael

    (Risk Advisory)

  • Van Vliet, Ben

    (Stuart School of Business)

Abstract

This paper develops a new performance measurement methodology for algorithmic trading. By adapting capability from the quality control literature, we present new criteria for assessing control, expected tail loss and risk-adjusted performance in a single framework. The multi-scale capability measure we present is more descriptive and more appropriate for algorithmic trading than the traditional measure used in finance. It is robust to non-normality and the multiple time horizon decision processes inherent in algorithmic trading. We also argue that an algorithmic trading strategy, indeed any investment strategy, which satisfies the criteria to be multi-scale capable also satisfies any definition of prudence. It will be unlikely to harm the investor or external market participants in the event of its failure, while providing a high likelihood of satisfactory risk-adjusted performance.

Suggested Citation

  • Cooper, Ricky & Ong, Michael & Van Vliet, Ben, 2015. "Multi-scale capability: A better approach to performance measurement for algorithmic trading," Algorithmic Finance, IOS Press, vol. 4(1-2), pages 53-68.
    • Handle: RePEc:ris:iosalg:0036
    as

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    Citations

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    Cited by:

    1. Wendy L Currie & Jonathan J J M Seddon & Ben van Vliet, 2022. "From decision optimization to satisficing: Regulation of automated trading in the US financial markets," Post-Print hal-03839100, HAL.
    2. Ben Van Vliet, 2019. "A Behavioural Approach To The Lean Startup/Minimum Viable Product Process: The Case Of Algorithmic Financial Systems," International Journal of Innovation Management (ijim), World Scientific Publishing Co. Pte. Ltd., vol. 24(03), pages 1-30, May.
    3. Van Vliet, Ben, 2017. "Capability satisficing in high frequency trading," Research in International Business and Finance, Elsevier, vol. 42(C), pages 509-521.

    More about this item

    Keywords

    Risk-adjusted performance measure; term structure of capability; algorithmic trading; prudence;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

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