2012-01-16 @ admin
Any application that is involved in the trading process and involves mathematical models is being labeled an algorithmic trading solution. This practice is confusing because there is an overlap between solutions in the market, tight integration between many of the products, and convergence of product functionality and packaged solutions. Algorithmic trading can be separated from what we call arbitrage/strategy trading, although the two are most often bundled by solutions providers. Our definitions follow:
Algorithmic trading. Taking a buy or sell order of a defined quantity and placing it into a quantitative model that automatically generates the timing of orders and the size of orders based on the specific goals of the algorithm and the constraints imposed. (For example: Trade so that my average price matches volume-weighted average price [VWAP] over the next three hours.)
Algorithms are typically oriented around trading to a benchmark, price, or time. Examples of algorithms include VWAP, time-weighted average price, arrival price, market close, and market open.
Arbitrage/strategy trading. Arbitrage or strategy trading involves allowing a mathematical model to automatically generate trades based on relationship or conditional parameters (not a specific share or dollar amount). (For example: If stock x is down by more than 50 bps and stock y is up by more than 50 bps, sell three shares of stock x and buy one share of stock y. Repeat until stock prices are equal.)
Other solutions often bundled under the “algorithmic umbrella” include:
Smart order routing. Using an algorithm to aggregate liquidity sources and generate the timing and size of an order. (This is distinct from algorithmic trading, which orients the timing and size of an order around a benchmark or target execution.)
Program trading. A set of individual trades that, when taken together, execute a strategy known as a “program.” The NYSE has a narrower definition of program trading, defining it as portfolio-trading strategies involving the purchase or sale of a basket of at least 15 stocks with a total value of $1 million or more.