The Meaning of High Frequency Data

Source: High Frequency Data: Higher and Higher

Some claim analysing high-frequency tick data reveals hidden behaviour trends in the market that can be profitably exploited.

Unlike exchanges, where prices and volumes are available for deals that have been transacted, prices in an over-the-counter market such as forex are far more ambiguous.

One tick might be from a market-maker, the next from a small hedge fund trading algorithmically, the next from a corporate trading infrequently and the next from an institutional trader working on a large order. Only at the tick level are the dynamics of the interaction between these different groups visible. Occasionally, the views of these different classes of traders suddenly coalesce and everyone acts in a similar way for a short period. Most of the time, there is quite a bit of spread across how people see things in the market, then something kicks in and they start thinking similarly.

When options expire in different time zones and in different currencies, there are big spikes in volumes. When lunchtime occurs, the markets know all about it. When there are data releases for a particular currency pair, you get big spikes - as much as four times normal trading in the five minutes before and the five minutes after a data release. The ebb and flow through the day is quite astonishing.

The trend across markets is to move to higher frequencies, and all participants are facing challenges in terms of their analysis and response to prices, events and opportunities. The processing speed race is leading to an increasing requirement for quantitative and technological approach to trading. This has also unlocked a number of new opportunities, as the capability to collect and analyse historical tick and order book data can lead to more accurate identification of significant patterns in the market data that can be exploited. This is where high-frequency data and its analysis are proving very valuable today, when combined with the fastest trading technology, in a wide range of fields including optimal order execution, competitive market-making or statistical arbitrage

Sound interesting? Recently, I have also been exploring the use of tick volume to assess the underlying market trend and to identify turning point. I have quoted some relevant information from the article for future reference.