Most of the 31 publishers referenced by Wall Street & Technology magazine offer trading robots and algorithms.
All offer trader support algorithms such as TWAP and VWAP that allow many low volume trades with high execution speed, so the key is to master transaction cost optimization and execution speed in real time.
While many algorithms and automated trading are used in trading roomsBanks often refuse to communicate around these technologies, because this information is considered sensitive.
Only software publishers, consulting companies (TABB Group) or university research laboratories offer data on the current state of products and technologies.
The basic algorithms of automatic trading
All of these algorithms work on the principle of grouping large orders into a series of tradable lots..
Several advantages are linked to this technique: reducing brokerage costs by having orders processed by machines for both purchase and sale rather than placing them by telephone, building sales strategies as close as possible to the market on a given period in order to be able to sell all the lots, reduce execution errors and save traders from tedious operations.
The use of this technology in Automatic Trading is the subject of seminars and training Because these methods are increasingly used in the world of trading, they require specific training.
VWAP (Volume-Weighted Average Price): This technique is mainly used by pension funds or mutual funds to sell a large volume in several small orders.
Reduce brokerage fees by matching buy/sell orders previously. A transaction in VWAP will be done for example at 40% in the morning and 60% in the afternoon, distributed according to the volume of transactions observed on the stock market.
TWAP (Time Weighted Average Price): This technique is used to make many small trades in a given period. As for the VWAP, it is about automating the purchase or sale of a large number of shares. A one-day TWAP will be split 50% in the morning and 50% in the afternoon. This method makes it possible to identify an average selling price.
Arrival Price / Deficit (IS, Implementation Deficit): The arrival price algorithm is used to determine a fixed price at which you want to buy or sell shares. The software performs all trades taking into account market impact, liquidity, volume and duration to arrive at this average price.
Volumetric percentage: Same principle of splitting volumes, this time in proportion to the volume of transactions in progress, which guarantees better execution of orders.
TVOL (target volume): This algorithm has the same functionalities as the previous ones (VWAP, TWAP) but trades based on a desired buy or sell volume.
How does automatic trading work?
These algorithms, once parameterized, must be accessible to programmers who will give them working instructions..
The main data used does not vary from what is already used by traders, because these algorithms are based on trading strategies designed and tested in the trading room.
Trading robots can run on different operating systems, Windows/Mac/Unix and are programmed with different Java languages, C# and mainly C++.
Also They use encryption systems and digital certificates that serve to authenticate and secure transactions.
Devices that need to support these algorithms that govern the operation of automatic trading and trading robots are particularly powerful.since in some cases they perform processing on various sources in real time, taking historical data into account to calibrate transactions (implied volatility for options trading, for example).
The starting idea is to make the trading robot completely autonomous in these commercial decisions to carry out the transactions in an extremely reactive way. To do this, you must select the data that should be taken into account.
The first data is the positioning in time. What are the optimal periods to consider to build a reliable dataset? When to start or close a transaction?
The second data is what types of transactions to carry out and on which markets and on the basis of which data: standard deviation (volatility), market microstructure, price level (spread).
Finally, the third data refers to the restrictions that must be established to avoid significant losses.
To optimize transaction costs, brokers offered direct access to the market, particularly dedicated to electronic transactions. The broker places less and less orders over the phone and concentrates on specific transactions.
There are several providers of trading robots:
– Brokers with a DMA platform usually offer algorithms that their clients can use.
– Publishers that can provide custom algorithms.
– Internal development by the biggest banks.
– Private investment companies offer quantitative management to their clients
The power of computers and trading robots now allows the implementation of behavioral and decision-making algorithms that are increasingly efficient and accessible to everyone.
Based on the concepts of artificial intelligence and game theory, these algorithms no longer have to be configured by traders or brokers, but it is a technology that is increasingly available to society as a whole. It is enough to have minimal basics in computer science and mathematics.
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