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On profitability and maximum tolerable latency in the high-frequency trading of a microtrend anomaly

Author

Listed:
  • James A. Primbs
  • Bogdan Mukhametkaliev
  • B. Ross Barmish
  • Sean Warnick

Abstract

Using Nasdaq ITCH data for Dow Jones Industrial Average stocks, we characterize the potential profitability and speed required for the exploitability of a stock trend-length anomaly via a high-frequency trading, microtrend-following strategy. We find that an idealized zero-latency trader could average up to 0.77% per day on an equally weighted portfolio, and more than 3% for specific stocks. However, the results are highly latency sensitive, and by relaxing the zero-latency assumption we calculate the maximum tolerable latency under which the strategy remains profitable to be 14.6 microseconds, on average, for the equally weighted portfolio and generally between 0 and 40 microseconds for individual components.

Suggested Citation

  • James A. Primbs & Bogdan Mukhametkaliev & B. Ross Barmish & Sean Warnick, . "On profitability and maximum tolerable latency in the high-frequency trading of a microtrend anomaly," Journal of Investment Strategies, Journal of Investment Strategies.
    • Handle: RePEc:rsk:journ6:7963139
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