CIFER 2014 Algorithmic trading Automated trading in financial markets Tutorial Aistis Raudys Vilnius University, Faculty of Mathematics and Informatics Naugarduko st. 24, LT-03225 Vilnius, Lithuania [email protected] 2014 February, London, UK Summary • Background • Algorithmic trading methods – Technical (Trend, Mean reversion, Seasonality) – Arbitrage – Statistical arbitrage (Statarb) – Fundamental – High frequency trading (HFT) • Optimizations 2 Algorithmic/automated trading • Classic way – Analyst analyses the market and makes a decision to buy or sell some specific asset – Trader executes the trade • Automated trading way – Analyst finds some reoccurring trading opportunities and codes the logic into the algorithm – Computer performs analysis and executes the trade 3 Algorithmic/automated trading • Computer program makes a decision: buys and sells without human intervention • Decision depends on – Human entered order (big order execution) – Single instrument market data (trend, TA, HFT) – Multiple instrument market data (statarb, trend) – Fundamental data (global macro, ratios) – News feed (event arbitrage) – Weather patterns ? Moon phases ? 4 Algorithmic trading Long term High trend frequency following trading Trading frequency 5 Also known as • Algorithmic trading • Automated trading • Robot trading / trading robots • Program trading • Mechanical trading • Systematic trading • High frequency trading • Low latency trading • Ultra low latency trading • Black-box trading • Trading models • Quant trading 6 Individual • Trading strategy • Trading system • Trading robot • Trading algorithm (algo) • A model 7 Individual • Trading strategy • Trading system • Trading robot • Trading algorithm (algo) • A model ? 8 Pros / Cons of Algorithmic Trading • Pros – Speed – can react quicker than human – Can be infinitely replicated – Emotionless – Will not quit or get sick – Can be tested using >20 years of historical data • Cons – Cannot react to unknown changes – Is not able to see the big picture 9 People - Quants • Mathematics • Statistics • Signal processing • Game theory • Machine learning • Computer science • Finance and Economics 10