Thanks, HFT. It seems that our definitions of backtesting are identical. I presume that the hardness of strict backtesting is the lack of trustable market impact model. Is that correct, or are there other difficulties? What strikes me is that with all these alternative ideas (and without strict backtesting) it should be hard to effectively optimize order placement strategies on past data. You said that that only a minority of the MM players use strict backtesting. Are these the big and more sophisticated players that do manage to create an impact model? Or are these the smaller players who try to play without impact?
Not sure if size/competency have as much to do with it as much as belief in and approach to the process. The strict MM'ing backtesters that I've personally known have all failed. The ones that I've heard of being successful at it presumably have good models for not just market impact, but many other variables like latency-distribution, queue position adjustments, exchange-specific detailing, etc. Some just don't think market impact alters the backtest result enough to write the backtest results off completely. Others believe in the effectiveness of their market impact models. I think more important than market impact is having good latency distribution, queue position, and exchange-specific models. Some fairly complex and successful firms/traders have tried to do all of these things, myself included. In the end I've always concluded that the variability that they introduce skew the backtest results enough to make them ineffective metrics of profitability and strategy effectiveness. If you understand the limitations you can gain useful insight from backtesting, but it can also lead to some very very bad conclusions being drawn. Someone mentioned earlier that backtesting can at least rule out bad ideas, which I agree with. You can tune backtest settings to be very optimistic and if that doesn't make money you can dump potential strategies very quickly.
Yep. However, 'marketable' is a very fickle term in HFT. But yeah, basically there is some price you're willing to buy/sell for and that's what you tag the order with.
What do you synchronize local time with? Exchange time, brokerage time, or UTC? Do you synchronize local time at the OS level or the trading platform level? Thanks again.
What do you think of this thread? http://www.elitetrader.com/vb/showthread.php?threadid=279057 He's trying to do what looks like medium frequency market making. Do you there's edge in that space, or has hft made it too difficult to passively collect spread?