Talk:Algorithmic trading

strategies and techniques

This article should be expanded to include various strategies and techniques used to implement algorithmic trading, i.e. stat arb, VWAP, etc. AT has really taken off in the past few years and there's a lot to talk about. Anybody? Ronnotel 23:03, 29 December 2005 (UTC)

Recent additions are cool. Here are a couple of other topics to consider:

• Pair trading
• Index dispersion trading (i.e. trading correlation)
• Program trading (i.e. baskets)

Any one feel like they know enough to tackle these? Ronnotel 17:29, 4 January 2006 (UTC)

Any input appreciated

Dear all, I was dissatisfied with the previous article and have followed the precept be bold WP:BB but hope I haven't been too bold or too close to the line of OR WP:NOR. All input, corrections, etc. are welcomed. Pdek 09:16, 19 April 2007 (UTC)

Iran Daily article

The article cited to the Iran Daily (I moved it to footnote number 2) looks very good - but I guess the source is incomplete - maybe it orginally came from Bloomberg? Does anybody know the original source? Smallbones 16:11, 8 May 2007 (UTC)

communication standards

I added a new section on communicatons standards for algo order types. This is a timely area as algorighmic trading goes more mainstream and the whole business becomes more standarizeds.

Input, corrections, etc. most welcomed. --Rick 19:05, 28 July 2007 (UTC)

Podcast section???

I demoted the following to an External Link, but may remove it entirely - since I couldn't find any podcasts. It looks like a good idea, no advertising to speak of, but if I can't figure out where the content is .... Smallbones 13:06, 12 October 2007 (UTC)

reformated the above, but not sure of its relevance (spam?). should probably delete. Smallbones (talk) 15:27, 5 January 2008 (UTC)

TRANSFINANCIAL ECONOMICS PROJECT

Podcasts and audio resources for the visually impaired A series of spoken interviews with experts on Algo Trading from the major banks, free to access

Could using clever programming be used to control inflation?

http://kheper.net/essays/Transfinancial_Economics.html —Preceding unsigned comment added by 195.188.183.89 (talk) 14:06, 5 January 2008 (UTC)

Please note the above kheper link is no longer authorative per se. But is kept onsite for old times. However, the following is the most authorative on TFE.

http://www.p2pfoundation.net/Transfinancial_Economics

TFE was also a subject at a scientific conference of the ICEME in April 2010.

BLACK-BOX ALGORITHMIC TRADING SYSTEM

There is a difference between Algorithmic Trading and Black-Box Algorithmic Trading. Algorithmic Trading means using Algorithms for trading, and Black-Box Algorithmic Trading means Proprietry Mathematical Complex Algorithmic System to predict markets with accuracy. One of the Top Inventors of the Black-Box Algorithmic Trading System is TradeMiracle .... AlgoTrader 13:06, 11 January 2008 (UTC) —Preceding unsigned comment added by 203.99.174.145 (talk)

Looks like an advertisement. It think it's better to delete this comment. Enerjazzer (talk) 04:00, 3 September 2009 (UTC)

I never heard of TradeMiracle. In fact there is a profound difference between algorithmic trading from buy side (i.e. hedge funds ) and sell side institutions (i.e. brokerages). Black box trading can be attributed to buy side trading. Yet I also see conversions of both, when some sell side algorithms are trying to access dark pools, they are in fact also working as black boxes. —Preceding unsigned comment added by Pulkinya (talk • contribs) 10:37, 12 May 2009 (UTC)

Techniques used

I'm a headhunter, and clients share with me the skills used in this area. Due to both confidentiality and the wikipedia "no original research" rule, I can't use these conversations, but I can point to job ads that show (for instance) that signal processing, filtering techniques like Kalman, etc are important.

But this begs the question of whether job ads are good enough sources ? —Preceding unsigned comment added by DominicConnor (talk • contribs) 15:10, 18 February 2010 (UTC)

• • I would say that we are presenting encyclopaedic knowledge. It seems mostly appropriate to list the techniques that are universally accepted to be used in algorithmic trading. If some people think that Kalman filters are important but others think otherwise, let's not place it here. In principle, one sentence listing areas such as Kalman filers may be fine, but not more than that. If desired, write a separate wikipedia article on techniques in algo trading. After all, why do people read this article? Because they want to know what is algorithmic trading. If they are seriously considering entering the field and trying to find out more information about the cutting edge technologies, wikipedia is not the place for that.

Commentor (talk) 15:04, 17 August 2010 (UTC)

Weird phrase

In the introductory passage there is a sentence One of the main issues regarding high frequency trading is the difficulty in determining just how profitable it is. What does it mean? Well, I can understand that it may be difficult to determine the profitability of high frequency trading, by why is it a main issue? Note also that this is an article on algorithmic trading generally, not specifically high frequency trading. Furthermore, this confusing sentence is followed by another one about the income generated by some 300 hedge funds and other participants. I have no idea what to say about this amount --- is it a lot of money or not. Also anyway, if we have this number available, then why is it a difficulty to determine the profitability of HFT? Commentor (talk) 14:59, 17 August 2010 (UTC)

Claim that HFT caused the flash crash is incorrect according to the sources that claim it

If you read the article's themselves they are not claiming HFT or even the algorithm caused the flash crash that day but that the trader at Waddell chose to unload the 4.1 billion dollar position all at once. The fact he used an algorithm at all is entirely irrelevant, almost all trades of all frequencies are not computer (AKA algorithm) executed. If it was a floor broker selling 4.1 billion dollars of the S&P500 or 9% of it's daily volume in 20 minutes the result would of been the same because of the sheer size of the sell order and the speed period of time it is sold onto the market. Here is a quote from one of the articles: "But Waddell's desk opted for an algorithm designed to sell 75,000 E-mini contracts at a pace that would range up to 9% of trading volume—and not take into account other factors. The report details how a similar-size trade earlier in 2010 took five hours to execute, but in this case, the Waddell trade unloaded on the market in just 20 minutes." A human trader clearly made a bad choice, what these articles don't say though is that HFT caused the flash crash. They use titles like algorithms gone awry but the algorithm it's self wasn't the culprit, and no where in the articles to they explicitly claim that an algorithm is the cause, also they never state the trade was an error or accident, it acted exactly as the trader intended it to, the issue was the selling of a massive order in a short period of time, which of course had huge market impact. So to conclude regulators implicated High-frequency traders, or algorithms as the cause is a massive twisting of what is actually being said and what happened. I'm guessing the person who stated that was the conclusion has some sort of axe to grind regardless of NPOV or factual accuracy. I encourage anyone interested in the validity of the claims HFT was the cause of the crash, or even curious as to wither a single article linked to as a reference contains anything stating HFT is the explicit cause of the crash to look for yourselves, because the references are not stating that. I encourage any user that cares about the article's factual accuracy to start cleaning it up. Financestudent (talk) 00:02, 31 October 2010 (UTC)

Unless and until algorithms evolve into sentient beings, then of course there will be a trader behind them. The SEC, the CFTC and the press all attribute responsibility to the trader - who used an ALGORITHM - for starting the Flash Crash. Next, high-frequency trading firms exacerbated the selling pressure by dumping inventory when these firms hit their risk limits, just like they are programmed to do.

You miss the point. Nowhere do I say "HFT caused" the Flash Crash. I say it is "implicated" or "directly contributed" or added to selling pressure or exacerbated price declines, all of which are amply footnoted to news reports and of course said outright in the SEC/CFTC report itself, or in Kirilenko's excellent paper.

Finally, in saying "A human trader clearly made a bad choice," if your point is that human beings ultimately caused the Flash Crash, well, yes, I think we'd all agree to that. Human beings also caused all of the deaths in the sinking of the Titanic, though I think most accounts mention the ship and the iceberg too.

Here are some references showing algorithmic and HFT implicated in the events of May 6:

Lauricella, Tom (October 2, 2010). "How a Trading Algorithm Went Awry". The Wall Street Journal.

Mehta, Nina (1 Oct 2010). "Automatic Futures Trade Drove May Stock Crash, Report Says". Bloomberg.

Bowley, Graham (1 Oct 2010). "Lone $4.1 Billion Sale Led to 'Flash Crash' in May". The New York Times.

Spicer, Jonathan (1 Oct 2010). "Single U.S. trade helped spark May's flash crash". Reuters.

Goldfarb, Zachary (1 Oct 2010). "Report examines May's 'flash crash,' expresses concern over high-speed trading". Washington Post.

Popper, Nathaniel (1 Oct 2010). "$4.1-billion trade set off Wall Street 'flash crash,' report finds". Los Angeles Times.

Younglai, Rachelle (5 Oct 2010). "U.S. probes computer algorithms after "flash crash"". Reuters.

Spicer, Jonathan (15 Oct 2010). "Special report: Globally, the flash crash is no flash in the pan". Reuters.

MarketsGuy (talk) 18:00, 9 November 2010 (UTC)

I think additional clarrification on the sources you posted is needed. To quote your sources the conclusion of the research paper you posted: http://www.afajof.org/afa/forthcoming/6130p.pdf

"The declining costs of technology have led to its widespread adoption throughout financial

industries. The resulting technological change has revolutionized financial markets and the

way financial assets are traded. Many institutions now trade via algorithms, and we study

whether algorithmic trading at the NYSE improves liquidity. In the five years following

decimalization, algorithmic trading has increased, and markets have become more liquid.

To establish causality we use the staggered introduction of autoquoting as an instrumental

variable for algorithmic trading. We demonstrate that increased algorithmic trading lowers

adverse selection and decreases the amount of price discovery that is correlated with trading.

Our results suggest that algorithmic trading lowers the costs of trading and increases the

informativeness of quotes. Surprisingly, the revenues to liquidity suppliers also increase with

algorithmic trading, though this effect appears to be temporary.

We have not studied it here, but it seems likely that algorithmic trading can also improve

linkages between markets, generating positive spillover effects in these other markets. For

example, when computer-driven trading is made easier, stock index futures and underlying

share prices are likely to track each other more closely. Similarly, liquidity and price efficiency

in equity options probably improves as the underlying share price becomes more informative."

>>>>I didn't post this paper. It's informative; it's also still a "claim." MarketsGuy (talk) 19:24, 10 November 2010 (UTC)

>>>>This is almost Alice in Wonderland. From what I can tell in the revision history, you posted this paper on August 25 at 18:05. And now you say I did. Remarkable. MarketsGuy (talk) 21:35, 10 November 2010 (UTC)

To quote one of the articles you posted: http://www.reuters.com/article/idUSTRE69E1Q520101015?pageNumber=3

All this tough talk has spooked high-frequency traders and the exchanges that rely on their liquidity and volumes. They note that HFT was not blamed outright in the SEC-CFTC flash crash report, and argue that its short-term strategies have made trading cheaper and easier for all investors. Richard Balarkas, CEO of Instinet Europe, the Nomura Holdings Inc-owned (8604.T) agency brokerage and alternative venue operator, said winding back the clock is a mistake. "I don't think investors on the whole want to go back to a market where they all pay a tax, usually in the form of a wider spread, to a firm making monopoly profits that will in any case wave a white flag as soon as a stock has a liquidity shock," he said in an interview. "It's crystal clear why the flash crash happened: a lack of buyers, and unthinking selling. It was pure, simple supply and demand within a regulatory regime that the SEC had created."

Sort of an important fact to leave out that the report isn't directly blaming HFT, the research study you posted on HFT said it should be encouraged in the conclusion, and that it was benificial, and that the initial selling from the mutual fund who did the 4.1 billion short not only triggered the even but was the cause from a simple supply and demand standpoint, which is what I was originally asserting. Hence why I also said that the fact the order was executed at an algorithm was irrelevant, even if it was executed with the same instructions by a floor broker the result would have been the same. Financestudent (talk) 19:00, 10 November 2010 (UTC)

>>>>Once again, I didn't post Hendershott. You did. And if you reread your quote from Reuters, the reporter is relaying the sentiments of "high-frequency traders" and certainly not relaying the conclusions of the report. Nowhere do I say the report solely "blames" HFT for the Crash; as many secondary sources concluded, the report certainly says HFT contributed to the Crash. It's very relevant the large seller was executing by algorithm - his strategy simply could not be implemented by a human being. Also, if he had been a human on a floor, no doubt at some point other traders would have walked up to him or her and asked simply "What are you doing?" MarketsGuy (talk) 19:24, 10 November 2010 (UTC)

You most likely have never studied the history of markets. To address your comment no-one would someone stop a floor broker from selling large amounts of shares, in fact many floor traders would try to trade alongside some of the "bigger" floor traders, shorting things and buying them alongside the large orders increasing the impact of those orders no matter what the market impact on other traders or investors. Read “Reminiscences of a Stock Operator” if you want to learn more about markets in the early 1900s. Generally sellers do not want that because the price impact ruins their execution price, while the traders doing this can then buy back their short position at the lower share price or sell their long position if there was large buying activity. This cat and mouse still is the case though with ice berged orders and algorithmic liquidity seeking today you could argue. However I doubt you've studied algorithms either. To quote wikipedia "An algorithm is an effective method for solving a problem expressed as a finite sequence of steps". To vaguely blame algorithms (as you did in your edits today) is no more effective at defining blame then to blame the abstract method of problem solving (which you actually did considering that is what an algorithm is). You would be just as correct in asserting selling caused prices to decline, yet just as unnecessary in describing the process as it is implied supply and demand forces are at work. So no the fact an algorithm was used is probably less relevant then the weather that day. More relevant perhaps was the Greek riots being broadcast on all over the world at the time, Europe seemingly crumbling, the Euro crashing, and the market being significantly down already that day, all real macro factors which set the stage for the crash once the rapid selling started. Perhaps on a less dramatic day something like rapidly selling 4.1 billion dollars of the broader market at any price (which of course forces the price down until buyers are found) would not have had the effect it had, but the low liquidity due to fear of traders and investors, as well as a high level of natural selling due to macro economic conditions were the conditions leading up to the crash. Unfortunately all of these factors together sort of made a fertile ground for something like this to happen. We can go back to the original debate of why someone would short 4.1 billion of S&P futures at any price especially in those conditions but it too is irrelevant as to why it was done since the rest here is history. Financestudent (talk) 02:30, 11 November 2010 (UTC)

>>>>>You don't get it, Financestudent. The issue isn't what I believe or don't believe. The issue is what regulators believe about these practices. In particular, they very clearly believe algorithmic and high-frequency trading were behind the Flash Crash. Just a fact, amply footnoted. The other issue is where that fact should be mentioned. It seems it should certainly be mentioned in the entries for "algorithmic trading," "high-frequency trading," and "flash crash." As for your repeated attempts to throw sticks and stones at my background and training, all I'll say is that they take my calls at 11 Wall and 1 Liberty. Do they take yours? MarketsGuy (talk) 17:21, 11 November 2010 (UTC)

"...largest point drop to date [?]"

I question the validity of this statement. I believe that the overall market had many other days in which the market "crashed" by larger numbers and percentages. For example, the crashes associated with Long Term Capitol Management, 911, the Asian Tigers, and the Depression were all higher as I recall. 24.49.38.184 (talk) 16:12, 10 May 2011 (UTC)

Remember, this is "point drop" - not percentage drop. So for example in the 1987 crash the Dow was down by a larger percentage but not by a larger point drop (because the DJIA itself was much smaller in 1987). It is a bit misleading and I will try to clarify it. MarketsGuy (talk) 19:33, 12 July 2011 (UTC)

merge with High-Frequency Trading

There are a number of elements in this article which are redundant with the High-frequency trading article, e.g. low-latency, arbitrage, market making. Additionally, a lot of the same claims are being made with regard to the risks/benefits of this form of trading are the same as those in the H-FT article using the same sources. I think the argument can be made that High-Frequency Trading is a form of Algorithmic Trading, so I would suggest the two articles be merged and cleaned up globally. I will apply the merge tag now, and look forward to the discussions. --Be gottlieb (talk) 20:25, 24 February 2011 (UTC)

Would very much disagree - here's why. HFT involves co-location, hardware & network interface tuning, logic gate arrays, etc. Algo orders are very different. Many algo orders are filled out by humans. They travel many thousands of miles over the Internet. There is no concern whatsoever with speed of the algo order entry, nor is there one iota of concern that order will take 50ms to arrive at the broker who will execute. All that human trader wanted to do is fill out a screen full of algo parameters and send it on its way. The trader was delegating "hand work" to the algos. He wanted to say "get me $10 million S&P 500 but loose the financials" - The algo did the "dirty work". Translated that into 400+ individual stock orders all with the correct round lot quantities to allocate the $10m correctly. It was never part of a high speed arbitrage strategy. The person entering the algo order may have been a long term fundamental investor.

Imagine a "buy and hold" forever trust portfolio, where the manager is informed one day it all must be liquidated because the heir is now of age and desires cash. He's held the same positions for decades (add that up in microseconds) and only now wants to "unload". Since some of the positions are beefy he selects an algo to "meter the sells" into the market in the least disruptive time frame, taking perhaps weeks to execute. Again, not exactly HFT.

Because algos can be used in so many different scenarios and since HFT is very specific - very short interval buys & sell - it would be shortsighted to cast these together as one.

HFT includes hardware and network acceleration Algos are "just" software

All HF trades are driven by algos, its true. Humans are not that quick. But the converse is not. All Algos are not necessarily paired with HFT for execution. 71.176.101.85 (talk) 05:01, 30 March 2011 (UTC)

There are three articles involved in a merge proposal: Algorithmic trading, High-frequency trading and Low latency trading. There is much overlap between the three. There either needs to be a merge or the articles need to be edited to clarify the differences and reduce the overlap. --Kvng (talk) 13:33, 27 May 2011 (UTC)

Thanks for the feedback, however we haven't come very far in the three months. I have experience as a programmer but not in financials, so I don't feel qualified to make any determinant move on the contents in the three articles. However I think the argument to merge these articles into the Algorithmic Trading article is still strong because:

1. @71.176.101.85 above, "All HF trades are driven by algos", indeed the algos come first and the HF hardware is customized (generally it is nothing very exotic, basically some souped-up computers and routers which allow 'direct' access to an exchange's trading system) to implement the algo. The fact that trades not only can but must be organized and carried out by algo predetermines the implementation of hardware, therefore I would maintain that HFT is a subset of AT. Also, the terms are conflated, even in specialist publications, such as here: where the term "high-frequency algorithmic traders" appears...

2. High Frequency Trading, Low Latency Trading, and any other computer-enabled trading system is predicated on decision-making algorithms. There are many forms of algorithmic trading, it is true, only some of them are ultra-fast. There are of course several distinctions which distinguish HFT, especially the hardware/network considerations, but I think the argument holds that an article embracing all trading practices enabled by the use of computer algorithms can legitimately be treated as a genus which includes HFT, LLT, etc.--Be gottlieb (talk) 13:20, 11 June 2011 (UTC)

HFT is certainly a subset of algorithmic trading, but an important one and deserving of its own page. The term is widely known in the industry and is becoming known to the public at large, is a significant branch of algorithmic trading with relatively unique group characteristics, and in many instances has very distinct sets of - and, at times, opposing sets of - practitioners, critics, and regulatory implications. MarketsGuy (talk) 19:54, 12 July 2011 (UTC)

I agree with MarketsGuy. The Merge Proposal flag dshould be removed and the HTF page should be edited to reflect it's position as a subset of Algo Trading, but it should remain on it's own page. That is all. MrJosiahT (talk) 18:06, 26 July 2011 (UTC)

Also agree with MarketsGuy. HFT and Low latency trading are specific types of algorithmic trading, and should not be merged with it, (there are algorithm that are clearly not high frequency nor low latency), but instead the articles re-written to highlight the differences. --Lgriot (talk) 16:17, 2 August 2011 (UTC)

Yet another voice agreeing that HFT and algorithmic trading are quite distinct kinds of trading. A previous post correctly emphasized the importance of specific technology issues (co-location, optimized hardware, etc.) for the former and their complete irrelevance for the latter. I would like to emphasize the economic distinction: HFT tries to MAKE money by being faster than the other guy; Algo trading generally tries not to LOSE money by executing a large trade with minimal market impace.