by Gord Collins

Fund Managers Switching to Algorithmic Trading

Electronic trading (and algorithmic trading) continue to gain acceptance with investors. There are some differing views as to whether computerization is generating these changes, or whether it is the use of complex mathematics-driven programming that is creating the valued edge in performance for algorithmic trading.

Statistics do show that program trading and algorithmic trading are being used more by institutional investors. It is very apparent that the market is undergoing an evolution. Those who adopt the new technology may achieve a mastery of it that will give them a decided edge in performance. Human expertise hasn’t been taken out of the equation, it’s just moved to a different level.

New Algorithms Creating an Advantage

As the price point of algorithmic trading falls below that of program trading (and traditional human managed order desks), many buy-side customers such as institutional fund managers are drawn to algorithmic trades to cut costs and improve transaction privacy. Institutional brokers are seeing less activity at their cash desks as powerful proprietary, broker-developed algorithms provide better responsiveness to market trends, and an ability to make trades that can’t be conducted effectively via traditional systems.

With the high volume of electronic trading today, institutional trading systems are overwhelmed with the volume of the data. Traditional trading programs can’t respond fast enough to analyze market transactions and seize opportunities. The demand for algorithmic trading comes from institutional brokers who are seeking to lower trading costs and to minimize manually worked orders and the commissions on those transactions.

Algorithmic Trading

Algorithmic trading is revolutionizing the equity trading industry drawing from diverse fields of statistics, mathematics, risk management, econometrics, finance, market microstructure, economics, computer science, and artificial intelligence. The system serves buy-side traders in their transaction timing and price setting. Algorithmic trading manages uses real time information from large stock market databases. This database is overwhelming for traditional trading systems to deal with. By using fine tuned mathematical algorithms, modern systems can see essential information that better represents key market factors. Many large institutional traders are realizing the advantages and are switching to algorithmic trading. A shortage of qualified mathematicians will thwart many companies from using creating effective algorthmic trading systems effectively.

Mathematical algorithms are a major technical innovation today. Complex algorithms are used by companies such as Google and Yahoo. They help to analyze and filter a changing database of billions of documents and links between Web pages to find the exact documents people seek. Similarly, security traders need to see transactional patterns in prices, volume and money flow in trades, and find those patterns that best represent the optimal volume and price points where a buy should be made.

The key to effective algorithmic trading is in executing large trades while moving the market as little as possible. All algorithmic trading technology should deliver the highest trade execution quality while simultaneously reducing information leakage. Often, this is accomplished by cutting down huge blocks of securities into small chunks and feeding them piece-by-piece into the market. The algorithm's job is to make the transaction as close to or better than the volume weighted average price during a given period of time.

Weighted Average Pricing: Guaranteed VWAP

Guaranteed VWAP (guaranteed volume weighted average pricing) guarantees execution of a trade at the volume averaged price. To offer greater security to investors, some brokers will guarantee execution the optimal price point. Guaranteed VWAP is usually offered to large cap investors.

Smart Execution

Smart Execution offers proprietary, technology-based equity trading services for clients in an array of investment fields. Smart Execution offers more than algorithm based technology. They apply this technology making and fine tuning over 100,000 trades a day. Choose Smart Execution to be your algorithmic trading provider.

Algorithmic Trading Information | Electronic Trading | Guaranteed VWAP | TWAP