Deep LOB Trading: Half a second please!

Jie Yin

Joint work with Hoi Ying Wong

Department of Statistics, The Chinese University of Hong Kong

NVIDIA GTC (GPU Technology Conference), March 21-24, 2022

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Table of Contents

1 Trading with Machine Learning

2 Data description
Limit order book
Chinese A-share market

3 The algo-trading system

4 Results of empirical study

5 Conclusions

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Table of Content

1 Trading with Machine Learning

2 Data description

3 The algo-trading system

4 Results of empirical study

5 Conclusions

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Introduction to trading

Trading types:
Long-term vs. Short-term
Interday trading vs. Intraday trading
Manual trading vs. Algorithmic trading
A study in 2019 showed that around 92% of trading in the Forex market was performed by trading
algorithms rather than humans.
Low-frequency financial data vs. High-frequency financial data
LF: daily open, close, high and low.
HF: limit order book, message book.
High frequency observations across one day of a liquid market can equal the amount of daily data
collected in 30 years.

We consider the intraday algorithmic high-frequency trading by limit order book data.

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Modeling LOB before trading

Statistical models by various stochastic processes.

1. The inherent noise and stochastic nature of financial markets limit the utilization.
2. Patterns of stock prices are too sophisticated and volatile to be captured.
Data-driven models by machine learning.
1. Forecasting short-term price movement of stocks.
2. Focusing on accuracy much more than the actual profits.
3. The trading is usually unrealistic.

Our objective:
To develop a novel deep LOB trading system that takes advantage of tick-time intervals with deep
learning and GPU techniques, predicts direct trading signals and executes orders to gain profits under
real trading circumstances.

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Table of Content

1 Trading with Machine Learning

2 Data description

3 The algo-trading system

4 Results of empirical study

5 Conclusions

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Limit order book (LOB)

In order-driven markets, traders place, execute, and cancel limit orders or market orders on ask
side or bid side.
The LOB provides a granular view of market data, listing all quotes at each price level.

Figure 1: A limit order book at time t and t + 1. The first level of the ask side is changed because of the cancellation of limit orders
or the arrival of market orders.

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Data summary

Characteristics of data:
Massive ⇒ GPUs
Shape: (T*S*4800, 40), where T is the number of historical days and S is the number of stocks.
Size: ≈ 5GB of LOB data for around 4000 stocks in the Chinese A-share markets per day.
Multivariate ⇒ Overfitting caution
Noisy ⇒ Model design to extract useful information
Sequential (time series) ⇒ Rolling window method
Labeled artificially ⇒ A multi-classification problem.
Three types of labels (trading signals): long, short, and none.
Trading action long : buy before selling. # upward trend
Trading action short: sell before buying. # downward trend
Imbalanced ⇒ Loss function
Profitable trading signals are few.
Transaction fees are nontrivial.
Spread costs by taking market orders which ensure the execution.
Time limit of one trading signal.

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Real data

(i) (i) (i) (i)

Data include the ask price pa (t), ask volume va (t), bid price pb (t), and bid volume vb (t) at every
level i at every time point t.
Chinese A-share market
• Levels: At most 10 levels (Level II data).
• Time interval between ticks: 3 seconds on average.
• Size: 4,500-5,000 daily ticks per stock.
(1) (1) (2) (2)
Time t pb (t) vb (t) pb (t) vb (t) ... pa(1) (t) va(1) (t) pa(2) (t) va(2) (t) ...
09:32:15 62.65 200 62.62 500 62.72 200 62.84 100
09:32:18 62.66 100 62.65 200 62.72 200 62.84 100
09:32:21 62.66 500 62.62 100 62.84 100 62.94 900
09:32:24 62.66 700 62.62 100 62.84 100 62.93 600
09:32:27 62.66 700 62.62 100 62.84 100 62.93 600
Table 1: A sketch of the basic features of stock SZ300869 on July 21, 2021.

Comparison with more mature markets:

• Nasdaq Nordic stock market in Ntakaris et al. (2018): 100,000 daily ticks per stock.
• London Stock Exchange in Zhang et al. (2019): 150,000 daily ticks per stock.

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Datasets

Simulation datasets: Three hypothetical market sentiments. (Uptrend, downtrend, and flat.)
Benchmark dataset: A small set of 20 stocks from the Chinese stock market and cover four
consecutive months provided by Huang et al. (2021).
Proprietary CS-100 dataset: LOB data covering 100 stocks selected by ranking the number of
signals combined with the in-sample performance from the entire Chinese stock pool covering around
4,000 stocks. This proprietary dataset is provided by the Fintech company TradeMaster1 .
Number of stocks (SZ/SH) Ratio of long/short signals Mean (std) of mid-prices
Group 1 25 (14/11) 0.26/0.25 70.76 (69.21)
Group 2 25 (13/12) 0.22/0.21 53.44 (95.03)
Group 3 25 (20/5) 0.18/0.17 47.47 (103.82)
Group 4 25 (21/4) 0.12/0.13 11.25 (12.36)
Table 2: Summary statistics. “SZ/SH” shows the number of stocks from the Shenzhen Stock Exchange and Shanghai Stock Exchange.

1
https://www.trademastertech.com
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Learning from data

Labeling ⇒ Signals: long, short, and none.

Normalization.
One ‘Figure’: 50*40. (10 levels, 50 latest ticks)
Historical time length: 50 days or more.
Pool training: 25 stocks or more.
⇒ Millions of ‘Figures’.
Deep convolutional neural network (DCNN) model.

CNN CNN
=⇒ Cat! =⇒ Not cat!

DCNN
=⇒ Long signal!

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Table of Content

1 Trading with Machine Learning

2 Data description

3 The algo-trading system

4 Results of empirical study

5 Conclusions

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System - Training, predicting, and trading

Figure 2: Framework of our deep LOB trading system for selected stocks.

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More details in training

1. Large data sets and high dimension. (50*40

dim)
× Traditional Machine Learning model, such as
SVM and decision trees. (Kercheval & Zhang, 2015)
✓ Deep learning, such as DNN, CNN and LSTM
model. (Zhang et al., 2019; Tsantekidis et al., 2017)
Figure: Deep convolutional neural network (DCNN) model architecture.

2. Imbalanced classification.
× Categorical cross-entropy (CE) loss function.
✓ Focal loss (FL) function. (Lin et al., 2017)
FL: Use hyperparameters to adjust the class weights. More signals are detected and profits are
improved.

3. Large stock pool.

× Single stock training.
✓ Group training.
The universal features in limit order book data can be extracted by deep learning techniques (Sirignano
& Cont, 2019). It is also beneficial in terms of time and computational requirements.

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Risk control in trading

Risk measure
Based on the estimated in-sample Value at Risk (VaR) of signal return, we cut the loss when the
current return is less than VaR
d α during the out-of-sample trading. It also helps to measure the
level of risk exposure in sample.
Optimization
Instead of investing the same amount of money all the time, we decide the investment based on
the current signal strength and in-sample performance.
1. Use the information like the estimated probability of a signal (p̂tlong , p̂tshort ) by the DCNN
model, the estimated returns for successful/failed actions.
Generally, p̂tlong ↑, p̂tshort ↓, current signal strength of long ↑, the “bet size” ↑.
2. In-sample estimated VaR d long
α ↑, the “bet size” ↑.
(*The explicit solution to optimal investment is omitted here.)

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Hardware

The training with very large LOB datasets is compute-intensive and the GPU platform is necessary
for acceleration in deep learning. CPU is not workable.
When training with a much larger stock group, the model can learn more universal features and
behave more stable. However, it will have higher requirements for hardware.
Apply parallel computing with multiple GPUs to speed up the process.
The training time is also related the version of GPUs, like NVIDIA K80, P100, V100 or A100
Tensor Core GPUs.

GPU Time (seconds) Val accuracy (200 epochs)

NVIDIA Tesla K80 40192.4 71.85%
NVIDIA Tesla V100-PCIE-32GB 10267.6 66.53%
NVIDIA A100-SXM4-40GB 8841.6 72.44%
Table 3: Comparison of three versions of GPUs with the training on one stock pool.

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Real-time tick-by-tick trading

Data normalization One step prediction Optimization

Time (milliseconds) 0.998 25.7 0.0047
Table 4: Average computation time of each stage.

The calculation is within 0.03 seconds. Time for additional order-related operations such as order
submission and execution in exchanges. (0.2-0.3 seconds)
A gap of longer than or close to 0.5 seconds is adequate to implement our system.
We are confident in implementing this system and obtaining considerable returns from eligible
markets, like the Chinese A-share market.

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Table of Content

1 Trading with Machine Learning

2 Data description

3 The algo-trading system

4 Results of empirical study

5 Conclusions

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Profits from the proprietary CS-100 dataset

The testing period is four weeks and is achieved using the rolling window method.
The transaction fee (10 basis points) is deducted.
Accumulated daily average profit (left), profit per signal per day (right) and average profit per signal
(next page) are all very promising, especially for stocks in group 1. The amount of invested equity
is at most 1 unit for every signal.
If we trade only one signal from the first stock group every day continuously, the annual return can
reach approximately 25%.

non-op-CE
0.0020 non-op
op

0.0015

Profit per signal per day

0.0010

0.0005

0.0000

−0.0005

−0.0010

Group 1 Group 2 Group 3 Group 4

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Profits from the proprietary CS-100 dataset

Group 1 Group 2
non-op-CE non-op op adjusted op non-op-CE non-op op adjusted op
Avg Profit 6.00 6.43 8.74 9.64 0.91 1.92 4.69 5.34
Std 0.0046 0.0045 0.0042 0.0043 0.0040 0.0041 0.0038 0.0040
Avg Qty 90.75 93.52 93.52 84.83 75.86 73.94 73.94 64.97
Std 49.10 51.68 51.68 44.04 74.31 68.88 68.88 54.48
0.15 - - 0.0008 - -
p-value
- 0.0 - - 0.0 -
Group 3 Group 4
non-op-CE non-op op adjusted op non-op-CE non-op op adjusted op
Avg Profit 1.97 2.70 4.98 5.27 3.02 4.76 5.43 5.45
Std 0.0053 0.0054 0.0050 0.0052 0.0064 0.0060 0.0056 0.0056
Avg Qty 47.87 49.75 49.75 47.03 22.53 31.80 31.80 31.73
Std 39.05 38.64 38.64 35.90 12.13 15.01 15.01 14.99
0.13 - - 0.02 - -
p-value
- 2.08e-171 - - 5.08e-15 -
Table 5: Statistical descriptions of the average profit per signal. “Avg qty” is the average number of signals per stock per day with the standard
deviation (“std”). The p-value is derived from the t-test on the average profit between two settings.

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Table of Content

1 Trading with Machine Learning

2 Data description

3 The algo-trading system

4 Results of empirical study

5 Conclusions

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Conclusions

An integral deep LOB trading system:

Learning : Basic features of the LOB are normalized and analyzed using a DCNN model to classify
current trading actions.
Implementation: From receiving the updated tick-report to executing the order, all of the steps in
the system can be completed within 0.5 seconds and implemented in the Chinese A-share market.
Profits: The performance of the system on simulated and empirical datasets shows the benefits of
our approach in terms of average profit per signal and accumulated profit.

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Reference

Huang, C., Ge, W., Chou, H., & Du, X. (2021). Benchmark dataset for short-term market prediction of limit
order book in china markets. The Journal of Financial Data Science.
Kercheval, A. N. & Zhang, Y. (2015). Modelling high-frequency limit order book dynamics with support vector
machines. Quantitative Finance, 15 (8), 1315–1329.
Lin, T.-Y., Goyal, P., Girshick, R., He, K., & Dollár, P. (2017). Focal loss for dense object detection. In
Proceedings of the IEEE international conference on computer vision, (pp. 2980–2988).
Ntakaris, A., Magris, M., Kanniainen, J., Gabbouj, M., & Iosifidis, A. (2018). Benchmark dataset for mid-price
forecasting of limit order book data with machine learning methods. Journal of Forecasting, 37 (8), 852–866.
Sirignano, J. & Cont, R. (2019). Universal features of price formation in financial markets: perspectives from
deep learning. Quantitative Finance, 19 (9), 1449–1459.
Tsantekidis, A., Passalis, N., Tefas, A., Kanniainen, J., Gabbouj, M., & Iosifidis, A. (2017). Forecasting stock
prices from the limit order book using convolutional neural networks. In 2017 IEEE 19th conference on
business informatics (CBI), volume 1, (pp. 7–12). IEEE.
Zhang, Z., Zohren, S., & Roberts, S. (2019). Deeplob: Deep convolutional neural networks for limit order
books. IEEE Transactions on Signal Processing, 67 (11), 3001–3012.

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Deep LOB Trading: Half a second please!

Thank you!

Jie Yin, Ph.D. student,

Department of Statistics,
The Chinese University of Hong Kong.
E-mail: jyin@link.cuhk.edu.hk.

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