s19 algorithmic trading and high frequency finance

8/13/2019 S19 Algorithmic Trading and High Frequency Finance

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arkets Technical Analysisand lgorithmic Tradinglgorithmic Trading )u tom ted T d ing Systemsand

igh Frequency Finance

Saeed Ebrahimijam

FALL 2013-2014

Faculty of Business andEconomicsDepartment of Banking andFinance

Dou Akdenizniversitesi

FINA417


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According to the new advances in the field of computer and IT which lead to

,high promotions in the other fields like finance that generates many .extensions in the research and business opportunities

- .Algorithmic finance seeks to bridge computer science and finance :It covers such applications as High frequency and algorithmic trading

Automated trading systems Statistical arbitrage strategies Momentum and other algorithmic portfolio management Machine learning and computational financial intelligence -Agent based finance omplexity and market efficiency Algorithmic analysis of derivatives valuation !ehavioral finance and investor heuristics and algorithms Applications of quantum computation to finance "ews analytics and automated textual analysis

ntroduction to Algorithmic Finance


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utomated Trading Systems


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Analy#ing quotes is a hard and tedious work that every trader is

.familiar with ,$ver time human concentration inevitably weakens which leads

.to errors in calculations and in the trading platform management

Human traders are capable of processing the information they

observe

.Mistakes in trading

Missing opportunities on financial markets.

!!!!uman s need to rest


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Managing a trade account using a computer program is called .Automated Trading or Algorithmic Trading

Is a computer trading program that automatically submits trades to an.exchange

24%obot trading can work hours a day without affecting their.effectiveness

.&motionless and strict adherence to a programmed algorithm

utomated Trading System


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elp you as expert consultant


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rade instead of you


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1'hen a manual person can trade lot and Algo 1000 ,can do times more than in a specific time

to that generate volume and volume generate.revenue

enefits of automated trading


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motion managementsystem - , ,fear greed confidence

oney management systemontrols how much you risk when you get ,n entry signal from your trading system. . ,e overtrade overleveraged in F$%&(market

dvanced subsystem tools


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2010As of the year more than 70% of the stockshares traded on the ")S& and "AS*A+ are

generated from

third of all &uropean ,nion stock trades in2006 ,were driven by automatic programs or

.algorithms

2006In at the ,ondon Stock &xchange over40%

utomated trading systems in the world financial:arkets
http://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/NASDAQhttp://en.wikipedia.org/wiki/New_York_Stock_Exchange


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,designed to trade stocks futures and forex based on apredefined set of rules which determine when to enter a

, .trade when to exit it and how much to invest in it

Algorithmic trading -High frequency trading

&lectronic trading platform

*ay trading software Technical analysis software

here ATS works
http://en.wikipedia.org/wiki/Algorithmic_tradinghttp://en.wikipedia.org/wiki/Algorithmic_tradinghttp://en.wikipedia.org/wiki/High-frequency_tradinghttp://en.wikipedia.org/wiki/High-frequency_tradinghttp://en.wikipedia.org/wiki/Electronic_trading_platformhttp://en.wikipedia.org/wiki/Electronic_trading_platformhttp://en.wikipedia.org/wiki/Day_trading_softwarehttp://en.wikipedia.org/wiki/Day_trading_softwarehttp://en.wikipedia.org/wiki/Technical_analysis_softwarehttp://en.wikipedia.org/wiki/Technical_analysis_softwarehttp://en.wikipedia.org/wiki/Technical_analysis_softwarehttp://en.wikipedia.org/wiki/Day_trading_softwarehttp://en.wikipedia.org/wiki/Electronic_trading_platformhttp://en.wikipedia.org/wiki/High-frequency_tradinghttp://en.wikipedia.org/wiki/Algorithmic_trading


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lgorithmic trading, also called utomated trading, -lack boxtrading, or -lgo trading, Is the use of electronic platformsfor entering tradingorderswith an

algorithm ,deciding on aspects of the order such as the timing

, ,price or quantity of the order or in many cases initiating the order .without human intervention may be used in any investment strategy including market making,

- ,inter market spreading arbitrage, or pure speculation (including

trend following). The investment decision and implementation may

be augmented at any stage with algorithmic support or may .operate completely automatically

lgorithmic trading
http://en.wikipedia.org/wiki/Electronic_trading_platformhttp://en.wikipedia.org/wiki/Electronic_trading_platformhttp://en.wikipedia.org/wiki/Electronic_trading_platformhttp://en.wikipedia.org/wiki/Order_(exchange)http://en.wikipedia.org/wiki/Order_(exchange)http://en.wikipedia.org/wiki/Algorithmhttp://en.wikipedia.org/wiki/Investment_strategyhttp://en.wikipedia.org/wiki/Investment_strategyhttp://en.wikipedia.org/wiki/Investment_strategyhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Trend_followinghttp://en.wikipedia.org/wiki/Trend_followinghttp://en.wikipedia.org/wiki/Trend_followinghttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Market_makerhttp://en.wikipedia.org/wiki/Investment_strategyhttp://en.wikipedia.org/wiki/Algorithmhttp://en.wikipedia.org/wiki/Order_(exchange)http://en.wikipedia.org/wiki/Electronic_trading_platform


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A special class of algorithmic trading omputers make elaborate decisions to initiate orders based on

,information that is received electronically before human traders are .capable of processing the information they observe

Aiming to capture .ust a fraction of a cent per share or currency unit on

,every trade - .HFT move in and out of short term positions several times each day HFT shown to have a potential Sharpe ratio thousands of times higher

than the traditional - -buy and hold . *strategies 2009, 60-73% .As of of all ,S equity trading volume -High frequency trading strategies

- )igh frequency trading HFT

* Aldridge, Irene (July 26, 2010). "How ro!i#$le i% &ig& !re'uenyr#ding" Hu!!ingon o%.
http://en.wikipedia.org/wiki/Sharpe_ratiohttp://en.wikipedia.org/wiki/Buy-and-holdhttp://en.wikipedia.org/wiki/Buy-and-holdhttp://en.wikipedia.org/wiki/Buy-and-holdhttp://en.wikipedia.org/wiki/Sharpe_ratio


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Investopedia explains 'High-Frequency Trading - HFT'High-frequency trading became most popular when exchanges began to offer incentives for

companies to add liquidity to the market. For instance, the New ork !tock "xchange has a

group of liquidity providers called supplemental liquidly providers #!$%s&, which attempt toadd competition and liquidity for existing quotes on the exchange. 's an incentive to the

firm, the N!" pays a fee or rebate for providing said liquidity. 's of ())*, the !$% rebate

was +).)). ultiply that by millions of transactions per day and you can see where part

of the profits for high frequency trading comes from.

/he !$% was introduced following the collapse of $ehman 0rothers in ())1, when liquidity

was a ma2or concern for investors.

Definition of 'High-FrequencyTrading - HFT'

' program trading platform that uses powerful computers totransact a large number of orders at very fast speeds. High-

frequency trading uses complex algorithms to analy3e multiple

markets and execute orders based on market conditions. /ypically,

the traders with the fastest execution speeds will be more profitable

than traders with slower execution speeds. 's of ())*, it isestimated more than )4 of exchange volume comes from high-

frequency trading orders.


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A timestamp A financial security identification code :An indicator of what information it carries !id price Ask price Available bid volume Available ask volume -ast trade price -ast trade si#e - ,$ption specific data such as implied volatility , ,The market value inf ormation such as the actual numerical value of t he price

,available volume or si#e- .A timestamp records the date and time at which the quote originated- - -the number of observationsin a singleday of tick by tick data is equivalent

30 .to y ears of daily observati ons

I / *ATA


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-mplementing High Frequency TradingSystems


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, ,%eceive evaluate and archive incoming quotes -0erform run time econometric analysis -Implement run time portfolio management

Initiate and transmit buy and sell trading signals -isten for and receive confirmation of execution - &alculate run time 0 - *ynamically manage risk based on current

portfolio allocations and market conditions - -A successful high frequency trading system adapts

.itself easily to contemporary market conditions

-ey Steps in Implementation of High Frequency Systems


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- 10 ( )%eal time data for the first seconds of trading in Apple AA0- 930 . . , 25,starting at a m Eastern on Wednesday July the first chance the

' 3 .full "AS*A+ had to react to Apple s disappointing + earnings report


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)vailable software platforms Intellihart 0roharts Tradestation &signal Metastock -'ealth -ab Amibroker 1T Trader

"eoTicker "in.aTrader MetaTrader


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eta Trader software


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anually trading


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uto trading


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+- compiler


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reate your own technical analysis indicators ofany complexity

- : ( ),se Auto trading expert advisor &A to workon various financial markets

*evelop your own analytical tools based onmathematical achievements and traditional

methods

'rite information trading systems for solving a ( , ,wide range of tasks trading monitoring, .)alert ing etc

+- tasks


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0rogrammers can test their automated tradingsy stems on historical or current market data in

order to determine w hether the underlying .algori thm guiding the sy stem is profitable or not

-ack testing software are special tradingplatforms which enable trading sy stem designer to

develop and test their trading systems on

historical market data w hile aiming to produce .optimal historical results

trategy Tester


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trategy Tester

s19 algorithmic trading and high frequency finance

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