Automated Creation of a High-Performing Algorithmic Trader via Deep Learning on Level-2 Limit Order Book Data

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Automated Creation of a High-Performing Algorithmic Trader via Deep Learning on Level-2 Limit Order Book Data

Aaron Wray
Matthew Meades
Dave Cliff
Published on 11/29/2020
Equities
Derivatives
AI
Deep learning
Machine learning
High frequency trading

The paper presents DeepTrader, a deep learning neural network that automatically learns to become a high-performing algorithmic trader by passively observing an existing successful trader T. The system takes Level-2 limit order book (LOB) data as input and is trained on snapshot/quote pairs: for each LOB snapshot S observed by T at the time of issuing a quote Q, the network learns to output Q when shown S. This approach avoids explicit price prediction and instead directly mimics T's decision-making process. DeepTrader is evaluated against several benchmark algorithmic trading systems, including two that have been shown to outperform human traders, and it matches or exceeds their performance. Additionally, the authors analyze the trained network to identify which LOB features are most influential, providing interpretability. The work demonstrates a novel method for creating algorithmic traders via imitation learning from market data, with potential applications in automated trading strategy development.

Highlights

  • 1DeepTrader learns to replicate a successful trader's behavior from Level-2 LOB data without explicit price prediction.
  • 2The system matches or outperforms existing algorithmic traders, including those that beat human traders.
  • 3Explainability analysis identifies key LOB features used by the learned trader.
  • 4Method enables automated creation of algorithmic traders from passive observation of any trader T.

Methods

  • M
    Deep learning neural network (DLNN) trained on snapshot/quote pairs from a target trader T.
  • M
    Level-2 limit order book (LOB) data as input features.
  • M
    Supervised learning with input-output pairs: LOB snapshot S and corresponding quote Q.
  • M
    Post-hoc feature importance analysis to interpret the learned network.

Results

  • R
    DeepTrader learns to match or outperform the target trader T in various market scenarios.
  • R
    Outperforms two benchmark algorithmic trading systems from the literature.
  • R
    Network relies on a subset of LOB features, with some being more important than others.
  • R
    Demonstrates that black-box deep learning can create explainable copies of arbitrary traders.
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