ALGORITHMIC & H-F TRADING AGENDA
▸ History
▸ Strategies
▸ High Frequency Trading
▸ Flash Crash
▸ Further readings ALGORITHMIC TRADING
▸ Trading Systems reliant on mathematical formulas to determine trading strategies
▸ Orders executed according to pre-programmed instructions accounting for various variables (i.e. timing, price, volume)
▸ Used in all asset classes
▸ Example algorithm: GlobalFXUnited Bet on EUR/USD volatility: If many participants buy, they sell and vice versa HISTORY
▸ 1960s: Helmut Weymar -Created a model to price cocoa futures for Nabisco
▸ Commodities Corporation: Detailed models, success and expansion
▸ Unexpected events-> “… got teeth kicked in…”
▸ Risk management: Technical Computer System
▸ Risk management -> Investing program
▸ New trend following vs random walk paradigm
▸ 50%+ Profits-> Copycats emerged ▸ New technological possibilities spawned new strategies (i.e. statistical arbitrage, regression to mean) ▸ Number of players in the market increased
▸ By 1999: Electronic exchanges
▸ Speed makes a difference-> High Frequency Trading ALGORITHMIC TRADING STRATEGIES
▸ Volume/Time Weighted Average Price (Low Impact Block buying/selling) ▸ Trend Following
▸ Pairs Trading
▸ Mean Reversion
▸ Social Media Trading HIGH-FREQUENCY TRADING
▸ Quantitative trading characterised by short-holding periods ▸ Fast computers find predictable patterns (i.e. Spot prices go up, futures go up)
▸ Short-holding periods minimise risks
▸ Various Strategies exist HFT STRATEGIES
▸ News-based Algorithms analyse incoming electronic faster than humans and make the trades before the market reacts.
▸ Ultra low latency Speed is used to gain minuscule advantages in arbitraging price discrepancies in some particular security trading simultaneously on disparate markets. -> Means of transportation become relevant. HFT STRATEGIES
▸ Ticker Tape Trading Market data is observed for significant or unusual price changes and the algorithm tries to profit from this. I.e. A pension fund acquires a stake in a company. The algorithm notices the block order and buys a stake as well.
▸ Statistical Arbitrage Predictable temporary deviations from stable statistical relationships among securities are exploited in all liquid securities. I.e. Convertible arbitrage
▸ Spoofing (illegal, but common) Orders, which are canceled, are used to move the markets FLASH CRASH
▸ May 6, 2010
▸ Major US Indexes crashed and rebounded for no obvious reason by ca 9%
▸ Why?
▸ Navinder Singh used HFT strategies (among them spoofing), which amounted to a $200m short and were replaced or modified 19k times before the crash occurred
▸ Regulators and public started to gain interest BOOKS, LINKS & ARTICLES
▸ http://www.bloomberg.com/news/articles/2014-07-15/wall- street-grabs-nato-towers-in-traders-speed-of-light-quest ▸ Flash Boys by M. Lewis
▸ HFT: A practical guide by I. Aldrige ▸ Kirilenko & Kyle academic papers
▸ More Money than God by S. Mallaby