How Algorithmic Trading Works?:
TRADING ORDERS, WITH
ALGORITHM DECIDING ON
ASPECTS OF THE ORDER.
The computer program decides according to aspects of the orders which are:
All other elements of Quantitative Approach
Algorithmic trading have been growing rapidly since mid
1990s and it is expected to account for over 40% of all trading
volume by 2015 worlwide. Today, algorithmic trading is widely
Divide large trades into
several smaller trades
Manage market impact,
Provide liquidity to the
High-frequency trading is the execution of
computerized trading strategies characterized by extremely
short position-holding periods. In high-frequency
trading, programs running on high speed computers analyze
market data, using algorithms to utilize trading opportunities that
may open up for only a fraction of a second to several hours. High-
frequency trading, often abbreviated HFT, uses quantitative
investment computer programs to hold short-term positions in
equities, options, futures, ETFs, currencies, and all other financial
instruments that possess electronic trading capability.
Differences Between Algo and HFT
Algo-trade refers to any computerized trading
strategy and can include the holding of assets for long
periods,whereas HFT is sub-class that aims for very short
Biggest “Cash Cow” on Wall Street
It generates approximately $15 - $25 billion revenue.
The speed factor in trading is “latency”. “Ultra-low latency” is trading at
. speeds of less than 1 microsecond.
Placing a limit order to sell above the current
A buy limit order below the current price in
order to benefit from the bid-ask spread.
Traders attemping to mimic an index return.
Electronically traded funds (EFT) are mostly
traded using variation benchmarking algorithms.
MOC order is to buy or sell stocks or futures
and options contracts as near as possible to when
the market closes for the day.
The average price of contracts or shares over a
High-volume traders use TWAP to execute
their orders over a specific time so they trade to
keep the price close to that which reflects the true
Many pension funds and some mutual funds,
fall into this category.
It is a measure of the average price a stock
traded at over the trading horizon.
Determines a relation between :
The price of domestic bond
Bond deneminated in a foreing currency
The spot price of the currency and
A price of a foward contract on the country
How much the orders that it will place will
move the price
It aims at quickly executing orders to optimize
the trade-off between price impact and exposure
to adverse price movements or opportunity cost.
Is it Good or Bad for the Market?
Adds liquidity to the markets
Speeds execution time
Narrows the price spreads
between markets and exchanges
The low to zero capital
requirements that these so-
claimed “liquidity providers”
carry is problematic and
speculation over the danger that
unchecked high frequency
trading could cause to the entire
system is truely awful.
The algorithm will allow you to profit from
small changes in market price, by getting in
and out as fast as possible. The Shake
Algorithm is designed to reach maximum
profitability based on the amount of time it is
running in the market, rather then a specific
Flasch Crash – May 6, 2010
It was a United States stock market crash which the Dow Jones
Industrial Average plunged about 900 points only to recover those
losses within minutes.