DoğuAkdenizÜniversitesi Faculty of Business and Economics Department of Banking and Finance Fundamentals of Technical Analysis and Algorithmic TradingAlgorithmic Trading (Automated Trading Systems) and High Frequency Finance SaeedEbrahimijam Spring 2013 FINA417
Introduction to Algorithmic Finance 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 • Complexity and market efficiency • Algorithmic analysis of derivatives valuation • Behavioral finance and investor heuristics and algorithms • Applications of quantum computation to finance • News analytics and automated textual analysis
Human’s need to rest!!!! • Analyzing quotes is a hard and tedious work that every trader is familiar with. • Over 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.
Automated Trading System • “…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. • Robot trading can work 24 hours a day without affecting their effectiveness. • Emotionless and strict adherence to a programmed algorithm.
Benefits of automated trading • When a manual person can trade 1 lot and Algo can do 1000 times more than in a specific time, to that generate volume and volume generate revenue.
Advanced subsystem tools • Emotion managementsystem - fear, greed, confidence • Money management system controls how much you risk when you get an entry signal from your trading system, i.e. overtrade, overleveraged in FOREX market
Automated trading systems in the world financial markets: • As of the year 2010 more than 70% of the stock shares traded on the NYSE and NASDAQ are generated from • A third of all European Union stock trades in 2006 were driven by automatic programs, or algorithms. • In 2006 at the London Stock Exchange, over 40%
Where ATS works • designed to trade stocks, futures and forex based on a predefined 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 • Electronic trading platform • Day trading software • Technical analysis software
Algorithmic trading • Algorithmic trading, also called automated trading, black-box trading, or algo-trading, • Is the use of electronic platforms for entering trading orders with 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.
High-frequency trading (HFT) • A special class of algorithmic trading • Computers 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 just 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 ratiothousands of times higher than the traditional buy-and-hold strategies. * • As of 2009, 60-73% of all US equity trading volume. • High-frequency trading strategies * Aldridge, Irene (July 26, 2010). "How profitable is high frequency trading" Huffington Post.
TICK DATA • A timestamp • A financial security identification code • An indicator of what information it carries: • Bid price • Ask price • Available bid volume • Available ask volume • Last trade price • Last trade size • Option-specific data, such as implied volatility • The market value information, such as the actual numerical value of the price, available volume, or size -A timestamp records the date and time at which the quote originated. - the number of observations in a single day of tick-by-tick data is equivalent to 30 years of daily observations.
Key Steps in Implementation of High-Frequency Systems • Receive, evaluate, and archive incoming quotes • Perform run-time econometric analysis • Implement run-time portfolio management • Initiate and transmit buy and sell trading signals • Listen for and receive confirmation of execution • Calculate run-time P&L • Dynamically manage risk based on current portfolio allocations and market conditions - A successful high-frequency trading system adapts itself easily to contemporary market conditions.
Real-time data for the first 10 seconds of trading in Apple (AAPL) starting at 930 a.m. Eastern on Wednesday, July 25, the first chance the full NASDAQ had to react to Apple's disappointing Q3 earnings report.
Available software (platforms) • IntelliChart • ProCharts • Tradestation • Esignal • Metastock • Wealth-Lab • Amibroker • VT TraderNeoTicker • NinjaTrader • MetaTrader
MQL tasks • Create your own technical analysis indicators of any complexity • Use Auto-trading : expert advisor (EA) to work on various financial markets • Develop your own analytical tools based on mathematical achievements and traditional methods • Write information trading systems for solving a wide range of tasks (trading, monitoring, alerting, etc.)
Strategy Tester • Programmers can test their automated trading systems on historical or current market data in order to determine whether the underlying algorithm guiding the system is profitable or not. • Back-testing software are special trading platforms which enable trading system designer to develop and test their trading systems on historical market data while aiming to produce optimal historical results.