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

Corporation: Detailed models, success and expansion

▸ Unexpected events-> “… got teeth kicked in…”

▸ Risk management: Technical Computer System

▸ Risk management -> Investing program

▸ New vs random walk paradigm

▸ 50%+ Profits-> Copycats emerged ▸ New technological possibilities spawned new strategies (i.e. statistical , 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 -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 acquires a stake in a company. The algorithm notices the block order and buys a stake as well.

Predictable temporary deviations from stable statistical relationships among securities are exploited in all liquid securities. I.e.

▸ 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