What The Heck is Algorithmic Trading
i have been asked many times by traders what the heck is algo trading and how it really works, to put things in proper prespective i have got this artical from net by Arcturus which is help ful i hope you will enjoy ----So what the heck is Algorithmic Trading?
There is a growing interest and significantly increased coverage in the financial press of algorithmic trading and its impact or benefits, but what is it really all about and should I get excited about it?
Like so many things, algorithmic trading has grown out of the equity markets, where terms like VWAP and TWAP have regularly been banded about as traders and brokers have looked for ever smarter and more effective ways of executing trades and measuring the effectiveness of those executions.
You might well ask, what does this mean to me as a futures guy? – well potentially quite a lot, if you are trading more complex spreads and strategies or in reasonably large size.
The market leaders (predominantly brokers), view algorithm based trading as the next big wave of opportunity. This is not to say that they are completely new and futures participants haven’t already been using some of these strategies in varying shapes or form but with the continually increasing use of automated trading strategies, increased use of futures markets and their shift towards electronic access, their significance and importance will only continue to grow.
Originally algorithmic trading was predominantly seen as a way of reducing market impact of executions through the likes of iceberg orders or of achieving some measure of best execution against a benchmark or index. This normally led to the order being split up and executed throughout the day or over a period of time, given volume measures. Increasingly and certainly as we view it, the term can be applied a lot more widely to generally cover the use of computer programs and more sophisticated trading analytics to execute orders according to a pre-defined strategy.
Is this just broker and technology vendor hype?
Needless to say, there is a certain amount of this but the reality is that with the increased liquidity and flow in to futures and equity markets, the growth in electronic market access and automated trading systems available, then this area is destined to grow significantly. One need only look at the asset growth in the hedge fund space and their increasing importance to the financial markets to appreciate some of what is going on. Plus, the growth in protocols such as FIX, the commoditisation of the world, unbundling of commissions and so on.
Brokers have spent considerable amounts of time and money (particularly within the equities space) on developing algorithmic trading solutions that they can either use internally or deliver to their clients. While a number of the more quantitative funds have spent similarly on developing their own internal algorithmic execution models. Now, we are seeing more and more third party vendors, either adding algorithmic trading functionality or as experts within this space. Companies such as Portware, Flextrade, Orc and at the high end Apama.
As Arcturus, we have the benefit of working alongside some of these companies but also given our solutions development business and working with traders, recognise that not everyone needs a high end, expensive solution.
We are of the view that algorithmic trading extends to some fairly simple execution strategies that effectively free up the trader’s time to concentrate on more difficult trades where he can add more value (or alpha) through the market impact and anonymity sort of trades up to more sophisticated arbitrage and multi-asset type executions, which rely on complex execution strategies.
At the ‘low’ end, this means due to the small size of the order or significant liquidity that exists in the market, why should I be bothered spending time on executing an order to which I can add little value, when there are more significant orders to be done. This is the productivity tool approach, which means my time is better spent elsewhere.
Then there are the market impact and anonymity sort of trades, typically iceberg orders, where I either break up the size of my order to get it executed, pass it to a number of different brokers or execute the trade over a period of time.
Next is arbitrage strategies, particularly where I might be doing cash against futures or baskets against ETFs and need some more intelligent way of defining how that order is to be executed, legs to be leant on and size of each clip.
Along the way is VWAP, probably after iceberg orders but at this point less prevalent in the futures markets than equities, so we will quickly by pass it as we get up to spread or pairs trading and ratio trading. This tends to get very interesting within the futures and option markets where it is common to have multi-legged strategies or trade the likes of packs and bundles against each other or against cash.
These are merely put forward to highlight some of the areas that algorithmic trading is appropriate and may require the combination of a spreading tool and more sophisticated execution tool, to define how the trade is actually identified, handled and then executed.
Is this important?
If you are trading a small number of futures contracts on an ad hoc basis, then clearly not, otherwise absolutely. As traders are continually looking for a competitive edge, asset classes converge to provide more opportunities and direct access to exchanges grows, then algorithmic trading will only increase in significance.
This is why as Arcturus, working with many hedge funds and CTAs we will be launching our rules based engine as part of ArcTrader. Working with other funds and prop groups we develop specialist tools or work with other vendors to deliver the appropriate solutions to meet client needs. One thing we would certainly say, is that this is a rapidly evolving and growing space and no doubt, the use and availability of these sorts of trading tools will only become more widespread and accessible.
As always, we welcome your thoughts and feedback, so please take the time to send an email.
Arcturus Associates Ltd (www.arcturus-assoc.com), is an advisory business, involved in providing technology solutions to hedge funds, CTAs and prop trading groups, specifically around the automation of trading, order routing and connectivity to global markets. Through our subsidiary company, Arcturus Automated Trading Solutions Ltd (www.arcturus-ats.com), we make the automation process simple and offer seamless integration with existing front end applications. We offer specially developed off the shelf packages ,like ArcTrader, as well as bespoke development work. Arcturus is pleased to have strategic relationships with patsystems PLC and AKJ Inc, providing connectivity solutions to global derivative and equity markets. [Please see our website for a free and instantly downloadable demo of ArcTrader]
There is a growing interest and significantly increased coverage in the financial press of algorithmic trading and its impact or benefits, but what is it really all about and should I get excited about it?
Like so many things, algorithmic trading has grown out of the equity markets, where terms like VWAP and TWAP have regularly been banded about as traders and brokers have looked for ever smarter and more effective ways of executing trades and measuring the effectiveness of those executions.
You might well ask, what does this mean to me as a futures guy? – well potentially quite a lot, if you are trading more complex spreads and strategies or in reasonably large size.
The market leaders (predominantly brokers), view algorithm based trading as the next big wave of opportunity. This is not to say that they are completely new and futures participants haven’t already been using some of these strategies in varying shapes or form but with the continually increasing use of automated trading strategies, increased use of futures markets and their shift towards electronic access, their significance and importance will only continue to grow.
Originally algorithmic trading was predominantly seen as a way of reducing market impact of executions through the likes of iceberg orders or of achieving some measure of best execution against a benchmark or index. This normally led to the order being split up and executed throughout the day or over a period of time, given volume measures. Increasingly and certainly as we view it, the term can be applied a lot more widely to generally cover the use of computer programs and more sophisticated trading analytics to execute orders according to a pre-defined strategy.
Is this just broker and technology vendor hype?
Needless to say, there is a certain amount of this but the reality is that with the increased liquidity and flow in to futures and equity markets, the growth in electronic market access and automated trading systems available, then this area is destined to grow significantly. One need only look at the asset growth in the hedge fund space and their increasing importance to the financial markets to appreciate some of what is going on. Plus, the growth in protocols such as FIX, the commoditisation of the world, unbundling of commissions and so on.
Brokers have spent considerable amounts of time and money (particularly within the equities space) on developing algorithmic trading solutions that they can either use internally or deliver to their clients. While a number of the more quantitative funds have spent similarly on developing their own internal algorithmic execution models. Now, we are seeing more and more third party vendors, either adding algorithmic trading functionality or as experts within this space. Companies such as Portware, Flextrade, Orc and at the high end Apama.
As Arcturus, we have the benefit of working alongside some of these companies but also given our solutions development business and working with traders, recognise that not everyone needs a high end, expensive solution.
We are of the view that algorithmic trading extends to some fairly simple execution strategies that effectively free up the trader’s time to concentrate on more difficult trades where he can add more value (or alpha) through the market impact and anonymity sort of trades up to more sophisticated arbitrage and multi-asset type executions, which rely on complex execution strategies.
At the ‘low’ end, this means due to the small size of the order or significant liquidity that exists in the market, why should I be bothered spending time on executing an order to which I can add little value, when there are more significant orders to be done. This is the productivity tool approach, which means my time is better spent elsewhere.
Then there are the market impact and anonymity sort of trades, typically iceberg orders, where I either break up the size of my order to get it executed, pass it to a number of different brokers or execute the trade over a period of time.
Next is arbitrage strategies, particularly where I might be doing cash against futures or baskets against ETFs and need some more intelligent way of defining how that order is to be executed, legs to be leant on and size of each clip.
Along the way is VWAP, probably after iceberg orders but at this point less prevalent in the futures markets than equities, so we will quickly by pass it as we get up to spread or pairs trading and ratio trading. This tends to get very interesting within the futures and option markets where it is common to have multi-legged strategies or trade the likes of packs and bundles against each other or against cash.
These are merely put forward to highlight some of the areas that algorithmic trading is appropriate and may require the combination of a spreading tool and more sophisticated execution tool, to define how the trade is actually identified, handled and then executed.
Is this important?
If you are trading a small number of futures contracts on an ad hoc basis, then clearly not, otherwise absolutely. As traders are continually looking for a competitive edge, asset classes converge to provide more opportunities and direct access to exchanges grows, then algorithmic trading will only increase in significance.
This is why as Arcturus, working with many hedge funds and CTAs we will be launching our rules based engine as part of ArcTrader. Working with other funds and prop groups we develop specialist tools or work with other vendors to deliver the appropriate solutions to meet client needs. One thing we would certainly say, is that this is a rapidly evolving and growing space and no doubt, the use and availability of these sorts of trading tools will only become more widespread and accessible.
As always, we welcome your thoughts and feedback, so please take the time to send an email.
Arcturus Associates Ltd (www.arcturus-assoc.com), is an advisory business, involved in providing technology solutions to hedge funds, CTAs and prop trading groups, specifically around the automation of trading, order routing and connectivity to global markets. Through our subsidiary company, Arcturus Automated Trading Solutions Ltd (www.arcturus-ats.com), we make the automation process simple and offer seamless integration with existing front end applications. We offer specially developed off the shelf packages ,like ArcTrader, as well as bespoke development work. Arcturus is pleased to have strategic relationships with patsystems PLC and AKJ Inc, providing connectivity solutions to global derivative and equity markets. [Please see our website for a free and instantly downloadable demo of ArcTrader]
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