Most of the 31 publishers referenced by Wall Street & Technology magazine offer trading robots and algorithms.
All of them offer trader assistance algorithms such as TWAP and VWAP that allow many low-volume transactions with high execution speed, then the main thing is to master the optimization of transaction costs and execution speed in real time.
While many algorithms and automated trading are used in trading roomsBanks often refuse to communicate around these technologies, as this information is considered confidential.
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 bundling large orders into a series of tradable lots..
Several advantages are linked to this technique: reducing brokerage costs by having orders processed by machines on both the buy and sell sides rather than placing them over the phone, building sales strategies as close as possible to of the market in a given period in order to be able to sell all lots, reduce execution errors and save traders 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 many small orders.
Reduce brokerage costs by previously matching buy/sell orders. A transaction in VWAP will be made, for example, 40% in the morning and 60% in the afternoon, distributed according to the volume of transactions observed in the stock market.
TWAP (Time Weighted Average Price): This technique is used to make many small trades during 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 Shortfall): The arrival price algorithm allows to determine a fixed price at which you want to buy or sell shares. The software performs all operations taking into account the impact of the market, liquidity, volume and duration to arrive at this average price.
Volume percentage: Same principle of splitting volumes, this time in proportion to the volume of transactions in progress, which guarantees a better execution of orders.
TVOL (Target Volume): This algorithm has the same functionalities as the previous ones (VWAP, TWAP) but performs transactions based on a desired purchase or sale volume.
How does Automatic Trading work?
These algorithms, when parameterized, must be accessible to the programmers who will give them work instructions..
The main data used does not vary from what is already used by traders, as 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 languages Java, C# and mainly C++.
Also They use encryption systems and digital certificates that serve to authenticate and secure transactions.
The devices that must support these algorithms that govern the operation of Automatic Trading and Trading Robots are especially powerful.since in some cases they perform processing on various sources in real time, taking into account historical data 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 data set? When to start or close a transaction?
The second data is what types of transactions to carry out and in which markets and based on what data: standard deviation (volatility), market microstructure, price step (spread).
Finally, the third datum refers to the restrictions that must be established to avoid large losses.
To optimize transaction costs, brokers have offered direct access to the market, especially 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 generally offer algorithms for their clients to use.
– Editors that can provide custom algorithms.
– Internal development by the largest banks.
– Private investment companies offer quantitative management to their clients
The power of computers and trading robots currently makes it possible to implement 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 a minimum foundation in computer science and mathematics.
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