Understanding algorithmic trading for different asset classes


Algorithmic trading has emerged on stock markets because it is particularly applicable with limited liquidity.

On the contrary, it is usually not a liquidity problem in the foreign exchange and futures trading. Algorithmic trading does occur in bond trading, as it is difficult to standardize.

Stock market – although the orders and trades in the markets has long been predominantly electronic, the intelligence of how orders are placed electronically was only introduced in the early 2000s.

According to consulting firm Aite Group LLC algorithm trading was behind a third of all stock trading in the EU and the U.S. in 2006.

In summer 2009, TAB Group, an analysis firm publishes a report saying 73% of trading in the United States is algorithmic. It is difficult to say what proportion of trading in stocks of that are algorithmic.

The futures market – Algorithmic trading probably occurs mainly in two ways: 1) hedge funds using investment algorithms based on indicators such as moving averages, and 2) the trading of the underlying shares for the semester. (refers to futures contracts).

Foreign exchange market – because the currency market is over-the-counter (OTC), they act as broker price aggregators.

FX algorithms is thus similar to the investment algorithms that hedge funds using the stock market and the fact is that they serve the purpose. Execution Algorithms in currency trading exists.

Option markets – traditionally an element of electronic market making and automated position management allowing options algorithms are related to FX algorithms

Cross -asset algorithms exist as investment algorithm. A couple of examples :

Banks using arbitrage between equity futures and the underlying shares
Banks trading stocks against each other as hedges

Cross-asset algorithms are also in execution. An example :

An execution algorithm may initially choose to delta hedge orders in the futures market and then work delta-neutral, for example, an Ericsson B order combined together with a reversed position of the OMX 30 – whereupon risk in the execution is reduced

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