Execution of algorithmic trading on securities markets


Tactical strategies are used for smaller orders for financial institutions and individuals in order to make money on temporary liquidity or simply for convenience.

These strategies aim to control costs and risks involved in the execution.

Quantitative strategies (also called benchmark strategies)
Tactical strategies (also called synthetic order types )
Smart Order Routing ( often abbreviated SOR )

One way to understand the difference between the classes is to explain how they can interact : A quantitative approach schedules an order by splitting it into several parts, they are executed by a tactical strategy.

The tactical strategy applies Smart Order Routing for abstracting away the problems that shares traded on multiple marketplaces.

The quantitative approach aims to schedule the order at given intervals. The reason for the need is simple: if all volume are traded at the same time, the price is bad, if the volume is traded over extremely long time exposed to execution risk if the share price moves.

Scheduling is thus a balance between price risk and price impact . The balance is made by means of quantitative analysis. Examples of quantitative strategies is VWAP , TWAP and Implementation Shortfall ( IS).

Quantitative strategies are used for large orders. Ordinary users are buy-side traders , the vills say stock trader with managers of mutual funds, pension funds, hedge funds or other types of financial institutions. While sell-side traders (banks) use quantitative strategies suited for customer trading.

Tactical strategies are also called synthetic order types. A tactical strategy does not place orders over time according to a schedule based on quantitative methods, instead places orders solely based on real-time information from the order book.

Examples of tactical strategies are Stop, Randomized Iceberg and Peg . Market places often support multiple order types where a single type of order can be similar to a tactical strategy , such as iceberg , primary -peg or discretionary orders.

Smart Order Routing ( SOR ) places orders where the shares are traded at several points in order to get the best price.

Smart Order Routing provides a layer where the merchant or strategy sees a synthetic order book (also called consolidated order) consisting of liquidity from multiple venues, using SOR can shop in the synthetic order book.

Examples of Smart Order Routing strategies include Spray and Split. Advanced Smart Order Routing also handles Dark pools (anonymous trading).

Example of Algorithm Trading Execution

A trustee of a fund has decided to sell its holding of its investment in the telecom sector. The position is in this case 100 million in individual share.

In order to carry out the order calling the nominee to its brokers, contacts the bank, and ask for permission to sell stake in the company.

The administrator instructs that the order must be carried out during the day.

The broker at the bank finds that the order is too large to perform immediately, the broker decides to use algorithmic trading .

The broker believes that VWAP algorithm for the day is the appropriate strategy execution.

This means that the broker puts a sell order in shares in their system and then follows the computer’s behavior during the day. At the end of the day he reports to the administrator on how the sale went .

VWAP algorithm is to execute the order at the average price of the share during the trading day (or better).

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