What Is Algorithmic Trading And How Does It Work?
Big hair, Ray Bans, and excess...ah, the 80’s! Gone are the halcyon days of hustling traders verbally duking-it-out and acting like a schoolyard full of hormonal teenage boys. Today, trading consists of Big Data, casual dress, and caffeine. Programs compete on milliseconds for the best execution while playing market games and professional traders hold masters degrees in hard sciences whilst markets fragmented and went dark, thereby increasing their sophistication. Yes, trading is a very different animal from yesteryear and for you Arnuk-and-Saluzzi types as well as newbs, read on see this week’s infograph on how to decode AT...
The data is courtesy of QuantConnect and if you like it, check their out interesting blog.
Questions, comments, or concerns? Put it below.
Great Post! Streamlined description for those who don't have a strong understanding of alg. trading
There was a post with a video of quant traders a while back. This is interesting stuff. Always can be argued that intuition always has a place in any industry though.
Industry Leader - SAC Capital
Someone needs to scrub their data.
Are quants slowly replacing research analysts?
SAC has a large quant group.
Not sure how to exactly interpret this. Very cool that computer programs are changing the market, but it seems as though this kind of trading is a barrier to entry for upcoming traders. I hope as though this doesn't mean trading is becoming a dying profession.
interesting. but some disagreements:
-makes it sounds like all algorithms are about "math to find patterns"- a much bigger area is DMA to speed up transactions, disguising trade activity in lit pools, and order routing to find better prices in today's very fragmented stock market. (I pretty sure less than 50% of US equity is traded on NASDAQ or NYSE at this point)
-"75% volume of today's global markets is driven by algos" well 75% of US stocks. Probably around 40% UK. And very little of emerging markets. Obviously some other asset classes are much less suited for algos. due to lack of standardization and liquidity. But that will change I think.
-SAC is NOT an algorithmic trading shop. They are stock pickers (probably insider traders) but they use cookie cutter algos like Credit Suisse's AES for execution as described above like EVERY huge shop these days has to. The industry leader in cutting edge Algos? Was Citadel, probably still is. They famously paid their algo star Mikhail $75MM in 2008 and then he quit because he was insulted. Then he got another $100M + 30k/month to sit on his ass and non-compete for 9 months before staring his rival firm. (As for Rennaissance- nobody knows what they do).
-those quant programs listed are almost 100% USELESS for actually developing algorithmic trading platforms. Algorithms are about - Computer Science and Computer Engineering (Actually- the infrastructure is a bigger cost/time sink than software. People don't realize that. Needs to be constantly updated to compete)
PS- I'm not involved in algos directly, Just what I've picked up because they are pretty ubiquitous at this point.
Thank for your all of your comments and I see that there's a couple of questions out there so I'll answer them...
The quantitative analysts that are discussed in the infograph are those that have mostly replaced traders working at a desk, on the exchanges, or in the pits. Research analysts work at an IB, MM, or HF and conduct market, industry, and firm research on companies. I can certainly see the possibility of algorithms having a greater role in their analysis but business has a very human side to it and there will at least always be a need to see, touch, and feel the company in a sense. So in my opinion, no.
In my opinion, it's not dying but evolving and the traditional WS ways of trading are becoming more accessible to Main Street. However, there are two sides to this. First, check out the hyperlink in the introduction. It goes to Sal Arnuk and Joesph Saluzzi's website for their book, "Broken Markets". They're brokers who talked on Bloomberg radio about on how HFT is eroding the integrity of the markets. So either read it, Google them, or see some of my earlier posts, High Frequency Trading Is Not Breaking The Markets and Why Sales & Trading Is Dead As We Knew It. Second is Chris Stucchio, a software programmer who has blogged about how HFT's actually work [read specifically April 16th to May 28th 2012 posts]. And lastly, if your interested I may have some research studies that were done about the effects of HFT trading as well.
Great post, not sure why I only just now saw this but great job. Any good resources for someone who is interested in getting into this side of the business?
Learning Algorithmic Trading (Originally Posted: 01/30/2012)
I did a search and couldn't find much helpful. Does anybody have any good resources for learning algo trading (non-HFT)? The programming I think I can manage to figure out as well, as there seems to be plenty of good resources for learning to program just about anything under the sun, but I cannot find much information on the algorithms themselves.
I have checked out some of the books on Amazon that tend to come up, such as:
Trading and Exchanges: Market Microstructure for Practitioners The Encyclopedia of Trading Strategies Quantitative Trading: How to Build Your Own Algo Trading Business Inside the Black Box Algorithmic Trading and DMA: An Introduction to Direct Access Trading Strategies
But does anybody have any further recommendations? Feel free to PM as well if that'd be easier. Thanks for the help.
If you want some hands on experience, you can download ninjatrader and code your own in C#. I've worked with some day traders and they pay big money for anyone that can write custom scripts.
ie just program their ideas in C#? Are these non-HFT strategies?
Try going to Big Mike Trading (google search- awesome forum to ask questions/learn new strats, and develop algos. you can also sign up for an elite membership which gives you access to some pretty decent seminars and classes.
Thanks, I'll take a look.
Touche.
I thought it was the computers that learned algorithmic trading?
ZING
Dive in and build your own backtester.
Don't use C# though -- C++, python, Java, Matlab, R all better choices.
Do you know of any online sources that go over how to backtest in python?
Why no C#? Lots of shops are using it, hell I did a code test less than a month ago, and they gave you the choice, C#, VBA, or R. No other options.
Yeah, this was for XR Trading.
Algorithmic Trading (Originally Posted: 02/18/2011)
Just wondering if black box trading is losing popularity and if this is a strategy that has a future. I'm saying this as some colleagues of mine are looking at seeding a fund involved with this strategy and I was under the impression that these sorts of strategies find it hard to raise capital.
Algorithmic trading isn't a strategy. Stat-arb is a strategy. Algorithmic trading is just describing how the strategy is implemented. Many algorithmic trading strategies do have descriptions, but if you consider them to all just be "algorithmic trading", then it's easy to get confused into thinking it's a bit more opaque.
OK - are black box trading strategies becoming unpopular? Are these finding it hard to raise assets these days?
Is Algorithmic Trading in IBD or Technology? (Originally Posted: 08/28/2012)
Is algorithmic trading in the IBD department or in the technology department in a given bank? Does it depend on the bank ?
Its not IBD, it would be sales and trading division.
how did you get from trading to IBD and technology? :O
S&T IN an investment bank (FO).
Typically nominally in S&T; sometimes Quant Analytics. Regardless, they usually report up the food chain in a much different way than institutional flow trading and any (remaining) prop groups.
Quantitative analysts, but part of the S&T department
WTF
Thank you all for the useful comments.
Do HFT and algorithmic trading make the market more efficient? (Originally Posted: 09/02/2013)
Apologies if this is a dumb / redundant question :D Since the information on the stock gets acted on faster, doesn't that help reinforce market efficiency?
Yes, they reduce the pure arb opportunities, making a price across markets fairer, so you can't get something in a different exchange for a massively different price.
in general, as with any trading, they are making the market more efficient as long they are making money. otherwise, if they are making the markets less efficient then they would lose money.
to add to tazer they have also reduced transaction costs significantly.
could one argue that they are a good thing for technical analyists in some sense? if they both make markets more efficient and reduce transaction costs?
its funny you bring that up, one of the main arguments of technical analysis, and I assume you mean charting, is that markets are inefficient
although technically dont they also exacerbate volatility too?
very big topic lol. Here is a study that came out a few days ago. The study says no.
http://www.futuresindustry.org/downloads/Volatility_Study_8-27-2013.pdf
Oh yes. Its kind of like a domino effect.... take for example the stock exchange crashes. If theres a big enough trade, esp. by a significant player, one algorithm after another will pick it up and trade on it. And then you have the news feeds. I will note however that time delays are usually programmed in.
Not sure how strongly correlated algorithmic trading is with the volatility over the last 2 decades in the indexes though... I was actually thinking about that today... interesting stuff
Well, the HFT guys are running each other out of business now, so I'd say that they too are subject to the invisible hands.
number 8 http://www.cfapubs.org/doi/pdf/10.2469/faj.v70.n1.2
Google this:
The race to zero Speech given by Andrew G Haldane, Executive Director, Financial Stability and member of the interim Financial Policy Committee
Algorithmic Trading: Breaking The House (Originally Posted: 05/06/2012)
Svend Larsen and Peder Veiby are seen as the modern-day Norwegian Robin Hood’s. They both single-handedly defeated the algorithmic trading (AT) system of Timber Hill, a unit of Interactive Brokers. Earlier, the Public Court of Opinion found them innocent of any wrong-doing and public opinion is sympathetic in believing that AT gives an unfair advantage.
In an appeal to the Supreme Court, this past Wednesday they upheld the lower court’s decision clearing them of market manipulation. Despite the victory, Larsen and Veiby’s attorney Halder Tjoflaat stated his disappointment of the the court in not further clarifying the Securities Trading Act on market manipulation in lieu of this case. A case-in-point, the MIT Blackjack Team mathematically stacked the probabilities in their favor simply by card counting and defeated an asymmetric system of winning gambles and yet this was criminalized. Could they not see the value of this? The byproduct ought to have been the evolution of a refined black swan system by the “house” in accounting for such remote loss probabilities whereby repetitive use creates an efficiency rendering these strategies useless over time and making the overall system more robust. Rather than scorned, such people should be lauded as was the case here.
As long as they aren't hacking to extract and utilize this info then I would definitely say any criminal action against these guys would be equivalent to saying that equities trading is just a casino.
They bought securities that were undervalued so that the price would reflect what they felt was accurate. This should be a clear cut signal to everyone that automated trading systems are not automatic money making machines.
So these guys were prosecuted for making 40K over 5 years...
nice representation,
Any experience in writing trading algos? (Originally Posted: 12/29/2014)
I have played around with Quantopian, and this definitely seems like the way to go. Coding the algorithms is simple and backtesting is built in to Quantopian's system. What are your experiences with algo coding and tools used?
The theory is great, but in practice retail algorithms aren't the silver bullet people want them to be.
Wow,nice job dude.I didn't know about this Quantopian site. My thesis is on trading algorithms and part of the project is to show how it works. +SB
EDIT:Do you have any idea where I should start with Trading Algorithms? Programming language and books?
I would go with youtube videos first. https://www.youtube.com/user/sentdex Does a great job introducing python and covering everything from basics to more advanced skills.
https://www.copy.com/s/qZxXApJwfIHXI2sc/I.BasicsoftheIDE.pdf A great guide for algos on quantopian
A few books to start with for a basic introduction and general overview is Robert Kissel's The Science of Algorithmic Trading and portfolio management then move on to Optimal Trading Strategies: Quantitative Approaches for Managing Market Impact and Trading Risk.
Sell Side Algo Trading (Originally Posted: 07/28/2009)
I know what algorithmic trading on the buy side does, but what about the sell side at BB banks? Do they basically just create the algo trading platforms that the buy side people use?
Exercitationem sequi nihil qui quisquam nemo delectus. Sit placeat vel perspiciatis recusandae. Blanditiis voluptatum sunt ut velit deserunt.
Inventore quia iure sed modi. Est quia laboriosam eius fuga et quia. Aliquam animi voluptate alias consequuntur hic accusantium perspiciatis. Sed earum modi quidem voluptates molestias.
Inventore magni sint sed ullam accusantium. Laboriosam quia beatae tempora reprehenderit expedita harum repellat. Sint earum dolores qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Ut et autem est optio aut. Cupiditate ipsa temporibus libero et in officiis. Est quisquam ipsa quia qui repudiandae. Voluptatibus reiciendis neque mollitia voluptas doloribus. Explicabo provident illum ipsa enim dolores.
Iure corrupti dolor et eligendi culpa. Suscipit aspernatur nihil omnis autem adipisci laboriosam. Amet sed nostrum cupiditate laudantium.
Non autem debitis nihil totam. Nam aliquam reprehenderit vel molestias tempora necessitatibus perferendis. Quibusdam odit vel non dolorem.
Ut aut assumenda itaque. Sit et in quasi. Ipsam dicta et sed. Illum minima qui et atque voluptatem enim eveniet.
Magni odit quibusdam numquam vel rem vel. Exercitationem ipsum quis totam sed doloribus magni et. Eos aut dolorum et fugiat dignissimos iure rerum. Sed eius et eos quo et ut accusamus. Voluptatem ad eos mollitia et dolorem officia repellendus. Hic nisi eum vel debitis. Beatae illo magnam et nihil doloremque.