Week 11 - Algorithmic Trading Flashcards
What is algorithmic trading and what does it do?
Defined:
computerised execution of financial instruments
- aids the implementation stage of the investment cycle
- Individual algorithms are developed for specific goals
Why is algorithmic trading needed?
- arbitrage
- Speed
- minimising transaction costs
What are the characteristics of the time-weighted average price method?
- Impact-driven
- uniform time-based schedule
- unaffected by other factors
- Benchmarked against average price
Holds a signalling risk
What are the characteristics of the randomised time-weighted average price method?
- impact-driven
- uniform time-based schedule
- unaffected by other factors
- benchmarked against average price
- random quantities in each order to eliminate signalling risk
What are the characteristics of the volume-weighted average price algorithm?
- Impact driven algorithm
- Benchmarked against VWAP
- Uses historical data to estimate future volume
Risks as historical data not always accurate
What is the percentage of volume algorithm?
Attempts to follow actual market volume and executes orders according to desired participation rate
how is actual participation rate calculated?
(1/1-PR)-1 = actual participation rate
PR = target participation rate
What factors are to be considered when choosing an algorithm?
- Intended benchmark
- Level of risk aversion
- Desired goals
What is an impact-driven algorithm
Algorithm that aims to minimise price impact
What is a price-driven algorithm?
algorithm that aims to minimise trading costs
- considers price impacts, timing and price trends
What is an opportunistic algorithm?
algorithm that aims to take advantage of market conditions
What are the common strategies of high frequency traders?
- Market making
- Short-term directional trading
- Cross-venue arbitrage
What is the main factor dictating the success of a high frequency trader?
Speed
Latency is receiving and sending information
What is latency arbitrage?
What are the associated risks?
Arbitrage that takes advantage if latency across venues and other traders
Risk
- other High frequency traders
- Speed of trading decisions and execution
How is latency arbitrage managed by exchanges?
Markets introduce an artificial delay to even delays between venues
