Algorithmic trading is a method of executing a large order (too large to fill all at once) with

  • minimize transaction costs
  • minimize market impact
  • seek liquidity from alternative venues

Concepts

  1. Style: passive, normal, aggressive
  2. Cross the spread
  3. participation rates

Now let's introduce algos from classics to fancies.

DMA

TWAP

  1. Every 5-minute bucket executes evenly.

VWAP (still 60%)

  1. Every 5-minute bucket will have a pre-estimated volume.
  2. have to calculate volume bucket using historical 20+ day stock-specific data.
  3. volume band

Implementation Shortfall

  1. Use arrival price as benchmark. When price is more favourable than arrival price, IS algo will try to slice more. That's why IS is activated, it usually sends out child orders with high participation rates.

Volume Inline

  1. Max Vol = Volume Restriction
  2. Let x be the quantity of next child order in Open Auction. x / x + IEV = Max Vol

Smart Order Routing / Liquidity Providing

It is claimed by broker that trading in alternative venues gives you 3-5 bps better performance.

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