Algorithmic Trading: Key Components for Real Time Trading Systems (part 1 of 2)
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Algorithmic Trading
Key Components for
Real-Time Trading Systems
As the volume and velocity of financial market data continues
to soar, staying ahead of the competition requires the right trading
tools and infrastructure. The purpose of this article is to
present an overview of algorithmic trading and to detail the key
components that comprise a real-time algorithmic trading system.
What is Algorithmic Trading?
Algorithmic trading is the implementation of some form of
statistical or quantitative analysis for making transaction decisions
in the financial markets. The key principles behind this
analysis involve identifying patterns within historical data to predict
future market behavior or looking for arbitrage opportunities within
various markets. Algorithmic trading is typically broken down
into either profit seeking (signal generation) or execution management
based implementations.
>In the Beginning
The use of algorithmic trading started on the sell side to
assist brokers in placing large equities orders into the market in a
manner that would not impact the market and would achieve the best
price avoiding short term variations. These execution
strategies were initially very straightforward. Based upon
either volume or time-weighted averages of executions occurring in the
market place, corresponding orders were placed for small slices of the
larger order. In this manner, the entire order is executed
throughout some period of time, and the theory is that the average
execution price will be either the time or volume weighted price for
that period.
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