OlsenBlog

Policy makers are typically concerned with long-term economic issues; so why should they be interested in the field of high frequency finance that seems to deal with short-term market phenomena? High frequency finance has the potential of biotechnology and can revolutionize economics and finance by turning accepted assumptions upside down and offering novel solutions to today’s issues.

Why high frequency finance turns economics and finance into a hard science

High frequency finance is a new discipline in economics that was officially inaugurated at a conference held in Zurich in 1995 organized by Olsen. (more…)

The international response to the Haiti earthquake was immediate and illustrates the benefits of the Richter scale. Thanks to the global seismic surveillance systems, geologists could accurately measure the strength of the earthquake: it was a major earth quake of strength 7.0, there was no need for second guessing. A major earthquake in a densely populated area causes huge personal suffering requiring international aid. Without waiting for more detailed analysis, international rescue operations went into action to mitigate hardship. (more…)

Financial markets still follow business conventions that were adopted at a time when transactions were executed manually. Hidden to the public are the details of processing of the trillions of USD transaction volumes traded on a daily basis in the world’s financial markets. Given the huge amounts of money involved, one would assume that the technology is state of the art but in actual fact this is not the case. The settlement of financial market transactions follows business conventions that were defined, when banking was done without the help of modern computers and processes were manual. This explains, why even today international payments take two business days, which is quite extraordinary in our age of instantaneous communication. This archaic payment system has a significant impact on financial market stability. (more…)

I was invited to give a talk at a conference hosted by the Manchester Business School funded by a Marie Curie grant of the EU. The title of the conference was ‘Understanding the New World of Financial Risk Management – Research Agendas after Subprime’. The conference was interesting, because it included both practitioners and academics. The practitioners were sanguine, clearly stating that the current risk models are insufficient. In my talk I tried to introduce how high frequency finance opens a new world of research and explain, why this approach can revolutionize economics and finance.

Analyzing tick data of currency markets we have discovered 12 new scaling laws in the foreign exchange markets that complement the two scaling laws that we uncovered in the 90s. A scaling law exists when two quantities maintain the same proportions over a certain range. For the scaling laws that we have discovered the range of proportionality is big, a factor of 1000, from the purely intraday domain to inter-day and longer. Scaling laws play an increasingly important role in natural sciences from biology to physics and complex systems for the calibration of models. In economics, this has so far not happened. I believe that this could change in view of the many new scaling laws. (more…)

In the late 80s, we at Olsen coined the term high frequency finance to describe our scientific approach to finance and economics. We later published a book, Introduction to High Frequency Finance, that describes the new field. High frequency finance firstly deals with collecting as much information as possible; in particular storing all tick by tick market data, then in a second step studying the detailed statistical properties of the data; describing the economic processes and later based on these observations develop models to explain the observed phenomena. In biology, this approach has a long tradition. Biologists in the field of systematics have literally for centuries specialized in carefully describing the plants and only after completing this step have they moved on to introduce a systematic approach to categorize the species. (more…)

Action, reaction, and the echoes of uncertainty:
the R&D we should be doing, and how that will contribute
to true efficiency in the marketplace

Richard Olsen challenges three received notions that mire the global economy in counter-productive habits that destroy value: that market prices in gross time tell us everything we need to know; that such information as we have is a trustworthy indicator of things to come; and that the chain of events in price evolution is orderly and self-correcting.

Olsen Ltd. has discovered and validated 17 new power laws that prove this firm’s long-held belief: much of the market’s volatility is invisible to casual, low-resolution analysis. While much work remains to be done, Olsen is taking steps to encourage the accumulation and analysis of very-high-resolution data to fuel sophisticated models that leverage the insights and power of the new scaling laws. With two strategic objectives: to increase return as a product of the predictive capacity of better trading models, and to counter the effect of inevitably irrational behavior by providing liquidity in the face of skewed pricing patterns…

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