Algorithmic trading - Reiman Group

What is algorithmic trading?

Algorithmic trading is an automated system of placing and managing orders for trading in various financial instruments, using computer programs based on mathematical algorithms. Trading in the course of algorithmic trading takes place without human participation. Algotrader or quant trader only describes the algorithm of robot (mechanical trading system (MTS)) behavior in different situations in the programming language.

Based on the analysis of the previous price series of financial instruments, they calculate the probability of the future price falling into one or another range. The robot enters or exits a trade at certain changes in the price chart of the asset being traded. A popular method of algorithmic trading is High Frequency Trading (HFT), that is, electronic trading at very high speed. High-frequency trading robots open and close a large volume of short-term positions in order to make a small profit.

Algorithmic trading strategies

There are many algorithmic trading strategies that programmers put into a trading robot. The main ones are:

VWAP (Volume Weighted Average Price)
Volume-weighted average price. Distributes bid volumes evenly over a certain time interval at the best bid or offer price, but not more than the weighted average price for the set period.
Percentage of Volume
Percentage of trading volume. Maintains a fixed percentage of market participation that is selected by the user. Trades frequent and small trades, responding well to volume spikes.
TWAP (Time Weighted Average Price)
Time-weighted average price. Executes orders by evenly spacing them across equal time intervals. The strategy does not take into account projected changes in trading volumes, which can negatively affect the market.
Iceberg. The displayed bid for sale or purchase does not show the full size of the exchange order. Potential buyers see only a part of the order, and only after its execution the next part is published. And so until its full execution.
An exchange robot records the divergence of prices for identical or equivalent instruments on different trading floors, buys cheaply in one place and immediately sells more expensively in another, with the expectation that instrument prices will converge and positions will close at a profit. Arbitrage is considered a practically risk-free strategy because the robot buys assets for a short period of time avoiding sharp price fluctuations over time. The profit from arbitrage operation is, accordingly, also insignificant, while the total profitability is formed due to the frequency of transactions.
Trending strategy
The tasks of the strategy are: early identification of an incipient trend using various technical analysis indicators, issuing signals to trade in the direction of the trend and issuing signals to close positions when there are signs of the end of the trend.
A strategy for short-term intraday speculative operations. For scalping, high-frequency robots are most often used, which open and close positions in fractions of a second when a small profit of a few pips is achieved. The strategy is mostly used in futures markets, where the turnover fee is much lower.