Introduction

Technology continues to have an increasingly significant impact on how securities are traded in today's markets.

In the US, roughly 70-80% of financial transactions are attributed to algo trading. 

This proportion is clearly less in Europe but since European markets are largely dependent on American markets, it is sort of the same collateral effect. 

Every large broker-dealer provides algo trading services to their institutional clients in order to assist their trading. 

 

 

Algos are used to make trading decisions about timing/price/size of trade --> goal = reducing risk-adjusted costs. 

The term algorithmic trading is used to describe trading in an automated manner according to a set of rules.

It is often used interchangeably with statistical trading, which may or may not be automated. 

Statistical trading is based on signals derived from statistical analyses or models. 

Smart order routing, program trading, and rules-based trading are other terms associated with algo trading. 

 

More recently, the range of functions and activities associated with algo trading has grown to include: 

- market impact modeling

- execution risk analytics

- cost aware ptf construction

- use of market microstructure effects


 

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