Sampling Intervals and the Dangers of Common Sense
This afternoon I've spent quite a bit of time working on a few issues that popped up in today's testing of the greek engine. One was a bad copy constructor that was leading to bad calculated values, and another was the calculation of the high and low for a composite instrument. The guy doing QA looked at the formula for the composite:
Value = (Comp1 * 0.700) + (Comp1 * 0.400) + 0.55
and thought that the high/low on the day should be the simple application of this formula to the individual high/low values for the components. But that is not the case. The computed value of this function is a time-based function and unless the components are perfectly correlated, the high of one will not coincide with the high of the other. This means that the computed high will be the largest value of the computed quantity, and will most likely be less than the "expected" high value.
But it gets more interesting…
Because of the speed of ticks, we accurately track all trades for the determination of the high and low. However, downstream, we conflate the messages, so that when the calculation is actually performed, it may only be once every 100 trades (depending on volume). This means that the formula is not accurately calculating every value of the function - only those that it needs, and that, too, will effect the high/low as shown.
All this is just too confusing for the traders to cope with. So I used the equation:
Value(high) = (Comp1(high) * 0.700) + (Comp1(high) * 0.400) + 0.55
and decided it was better to have a clear, explainable value, than risk the confusion and effort of having to explain it to all the traders several times.