01
Feb
10

Algorithmic Trading


Aloha!

We are back after a loooong break. A lot of water has flown in Ganga since the last post. For starters, both authors changed have changed their workplaces, locations et al. Lots of brainstorming as to post topics etc (we also wanted to change the looks a bit, add some features, but I guess you’ll have to wait for sometime for that to happen) … So here we start with our first post on algorithmic trading.

Ok, I was not aware of this concept till Akshay briefed me about it. I was blown away when I got to know that more than 50% of trading in US and UK markets are automated. Yes, human programming and a computer execute over 50% of the trade in these markets (read this). So thought I should get a primer on how this works.

Market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically. In this “high frequency trading” (HFT) computers make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information.

Many different algorithms have been developed to implement different trading strategies. These algorithms or techniques are commonly given names such as “Iceberg”, “Dagger”, “Guerrilla”, “Sniper” and “Sniffer”.

Might just go in depth of each of these strategies in future posts.

An example of Algorithmic Trading in Indian markets

A program could be to sell the stock futures of a particular company and buy the stock if the futures price is x% higher than the stock price. Also, it could be to compare a set of variables — if rupee is more than 45 to the dollar, and crude oil is less than $60 per barrel — then the software would sell Infosys futures and buy HPCL shares.

Read this economic times article to see how it effects the Indian markets.

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So what’s this blog about?

Another attempt? Well yes. Attempting to figure out another sustainable model (there are some other attempts going on parallel-ly). Well, we have a lot of questions in mind. we read up stuff, we do some research to find answers to these questions. This is an attempt to publish that little 15-20 minute research.

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