WHAT IS HIGH-FREQUENCY DATA?

High-frequency data, also known as “tick data,” is a record of live market activity. Every time a customer, a dealer, or another entity posts a so-called limit order to buy s units of a specific security with ticker X at price q, a bid quote is logged at time t_b to buy units of X. (Market orders are incorporated into tick data in a different way as discussed below.) When the newly arrived bid quote has the highest price relative to all other previously arrived bid quotes in force, becomes known as “the best bid” available at time t_b. Similarly, when a trading entity posts a limit order to sell s units of X at price q, an ask quote is logged at time t_a to sell units of X. If the latest is lower than all other available ask quotes for security X, becomes known as “the best ask” at time t_a.

What happens to quotes from the moment they arrive largely depends on the venue where the orders are posted. Best bids and asks posted directly on an exchange will be broadcast to all exchange participants and other parties tracking quote data. In situations when the new best bid exceeds the best ask already in force on the exchange, , most exchanges will immediately “match” such quotes, executing a trade at the preexisting best ask, at time t_b. Conversely, should the newly arrived best ask fall below the current best bid, , the trade is executed at the preexisting best bid, at time t_a.

Most dark pools match bids and asks “crossing the spread,” but may not broadcast the newly arrived quotes (hence the mysterious moniker, the “dark pools”). Similarly, quotes destined for the interdealer networks may or may not be disseminated to other market participants, depending on the venue.

Market orders contribute to high-frequency data in the form of “last trade” information. Unlike a limit order that is an order to buy a specified quantity of a security at a certain price, a market order is an order to buy a specified quantity of a security at the best price available at the moment the order is “posted” on the trading venue. As such, market orders are executed immediately at the best available bid or best ask prices, with each market buy order executed at the best ask and each market sell matched with the best bid, and the transaction is recorded in the quote data as the “last trade price” and the “last trade size.”

A large market order may need to be matched with one or several best quotes, generating several “last trade” data points. For example, if the newly arrived market buy order is smaller in size than that of the best ask, the best ask quote may still remain in force on most trading venues; but the best ask size will be reduced to reflect that the portion of the best ask quote has been matched with the market order. When the size of the incoming market buy order is bigger than the size of the corresponding best ask, the market order consumes the best ask in its entirety, and then proceeds to be matched sequentially with the next available best ask until the size of the market order is fulfilled. The remaining lowest-priced ask quote becomes the best ask available on the trading venue.

Most limit and market orders are placed in so-called “lot sizes”: increments of certain number of units, known as a lot. In foreign exchange, a standard trading lot today is US$5 million, a considerable reduction from a minimum of $25 million entertained by high-profile brokers just a few years ago. On equity exchanges, a lot can be as low as one share, but dark pools may still enforce a 100-share minimum requirement for orders. An order for the amount, other than an integer increment of a lot size, is called “an odd lot.”

Small limit and market “odd lot” orders posted through a broker-dealer may be aggregated, or “packaged,” by the broker-dealer into larger-size orders in order to obtain volume discounts at the orders' execution venue. In the process, the brokers may “sit” on quotes without transmitting them to an executing venue, delaying execution of customers' orders.