How algorithmic trading is used in securities trading

electronic trading platform

Algorithmic trading (high frequency trading, robot trading, algo trading) is a software driven electronic trading of securities (especially shares).

Algorithmic trading entrusts the execution of an order to the software, called a trading algorithm that executes an order following predetermined rules.

Types of algorithmic trading

To understand algorithmic trading, it is necessary to grasp the difference between high-frequency trading and execution algorithms.

High-frequency trading/robot trading – the investor (often a hedge fund or a bank) buys and sells a number of individual shares through a trading algorithm in order to make money, at the end of day the investor probably owns no shares but have possibly made profits on their trades.

Execution Algorithm – institutional traders, through a trading algorithm, either buying or selling the number of individual shares to an investor, at the end of the day, the investor is likely to purchase a number of shares or sells an existing portfolio of shares

The algorithms aim to make money by taking on risks that :

1) is small in size 2 ) have positive average returns 3) are numerous

The phenomenon is most known as the High -frequency trading ( ” HFT ” ) and lies at the intersection of high-frequency state – piece and arbitrage trading. All the approaches described below can in theory be used by HFT funds.

Arbitrage trading
Quantitative observing trade
Quantitative interacting
Market making
News trading

Arbitrage -commerce refers to buying and selling an asset at the same time where the sales price is higher than the purchase price. The merchant only exposes himself to latency-/tidsrisk. Pure arbitrage does not really exist since the time risk can not escape .

It relates to the quantitative observation trading models for making money by investing in the short term. Investment decisions are based on statistical models, such as moving averages of prices or yields . Kvanta Tiva traders with short investment horizons are often hedge funds.

Quantitative interacting trading models for make money by investing in the short or very short term. Investment decisions are based on statistical models where the algorithm searches the order book and interact with liquidity.

Market making is a broad term, but in electronic commerce refers to the dealers quote prices in order books to make money over time. The instrument can be cross-asset, that is, in currency, equity, options simultaneously.

A large part of the turnover in the stock markets is linked to the market-making firms, in particular, market-making firms are active in alternative trading venues ( MTFs ) . You could say that MTFs and HFT have a symbiotic link because MTFs pay for the supply of liquidity, thus paid market-making firms for their trade.

News trading involves trading in order to make money where investment decisions in the short or very short term, are based on macroeconomic figures or news that can be standardized in a news feed (electronic signal from the news provider) .

News trading is so new that only the most sophisticated hedge funds and major banks are practicing it in an automated fashion.

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