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21
Algorithmic Trading (AT) - Framework for Futuristic Intelligent Human Interaction with Small Investors
Archit Bansal
Jayppe Institute of Information Technology University A-10,sector 62,Noida, 201010
Kaushik Mishra
Jayppe Institute of Information Technology University A-10,sector 62,Noida, 201010
Anshul Pachouri
Jayppe Institute of Information Technology University A-10,sector 62,Noida, 201010
ABSTRACT
Algorithmic trading has become more popular with large institutional investors these days. Big investment giants and top corporate notches are taking undue advantage of these algorithms over small investors. The one of the most critical factor which is limiting small investors to use these algorithms is lack of interactive user interface. This paper proposes a framework for intelligent interaction of these trading algorithms with the user which maintains required user adaptability, modeling and knowledge sharing in the coming future. Further the paper discuss about the various trading algorithms, their areas of concern and its likely impact on the market presently and in coming future.
value for the purchase. Needless to say that these algorithms are quicker in all aspects compared to manual trading. In spite of all its benefits the cost of implementation has prevented smaller investors and brokers from using these algorithms. This has tilted the balance in favor of large institutional investors. Therefore a need is felt to develop platforms which are affordable and accessible to the smaller players in the market. But these complex algorithms are hard to understand and to operate tools technical expertise is required. This calls for an improved intelligent interface which would prove to be helpful in improving human computer interaction and lead to a better understandability and improved usability on the part of technically weaker traders. There are various powerful algorithms being used by various organizations like Volume Weighted Average Price (VWAP), Time Weighted Average Price (TWAP), Market On Close (MOC) and Information shortfall [2]. Of all these VWAP has been the most popular model over the years.
General Terms
Algorithms, Measurement, Documentation, Performance, Design, Reliability, Human Factors, Standardization, Languages, Theory
2. TRADING ALGORITHMS
In this section, we have given a brief description of the three most prominently used trading algorithms, namely, VWAP, TWAP, and MOC. We have based our description on maximum order size and window of operation (time). We have presented a behaviorical description of these algorithms. Some of the other powerful and emerging algorithms that we have not covered here are Information Shortfall and SVP [3][4].
Keywords
Algorithmic Trading, Volume Weighted Average Price, Time Weighted Average Price, Direct market access, trading agents, Market-on-Close.
1. INTRODUCTION
Over the past few years there has been a rapid increase in the volume of trading done by algorithms. This can be easily gauged from the fact that in the premiere stock markets of the world like New York Stock Exchange and London Stock Exchange more than 40% of the trading being done in 2008 was through algorithms [1]. This new trend has led to an explosion of sorts with more and more world economies including India adapting to this change. In Algorithmic trading orders are placed with the algorithm which decides on various aspects of the order such as order price, size, timing of purchase etc. Usually these algorithms are used in bulk buying of shares. A large order is broken into smaller slices and placed at different interval of time so as to obtain the optimum
2.1 VWAP
When a bulk order is placed the algorithm breaks it into several smaller orders according to the historical data as computed to be optimum. Volume curves are generated which describe the objective buying. In case of intra-day buying if large fluctuations are observed then the curve is interpolated accordingly to reflect the current scenario. Orders are executed according to the volume curve as long as they are within the maximum order size supported by the algorithms. Once the limit is reached, trading stops. Hence brokers try to optimize the algorithm to increase the maximum trading limit. It is particularly useful when the trader is not able to gauge the current market trends [5].
2010 International Journal of Computer Applications (0975 - 8887) Volume 1 No. 21 Algorithms have revolutionized the landscape of capital markets. Its impact has been clearly felt in developed markets while developing economies adapt to the change. Other than the style of trading there have been several other changes that have been observed.
2.2 TWAP
This model is a special case of VWAP model. Here we assume that market position would be stable all through the day. The historical data that we take generates a flat volume curve. The bulk orders are simply broken on the basis of time. Generally there is a constant time gap between the orders placed. For example an order is placed every 20 minutes. Maximum order size constraints functions the same way as it does in VWAP. Here brokers need to adjust the time slices taking care that the order is completed.
2.3 MOC
This algorithm is useful in the financial derivative markets and securities which are auction based. In general this algorithm is used when trading is to be started after a particular time. Like in the case of auction based trading, bids are accepted after the starting time only. It functions on the basis of a time trigger, Algorithm waits for the time trigger and starts functioning after that.
Table 1. Major companies with their preferred Trading Algorithms[12] Companies Goldman,Sachs & Co Algorithms Preferred VWAP, VWAP Lite, TWAP, 4CAST (implementation shortfall), Percent of Volume, Piccolo (execution of small orders), Scaling, Gamma Hedge, Delta Hedge VWAP ,TWAP VWAP, Cost Minimization, and Smart Market. VWAP, TWAP, Target Volume, Sensitivity, Order Staging Model, Arrival Price VWAP, Target Volume, Advanced Pegging VWAP, TWAP, With Volume, Target Strike, arget Close, Wait and Pounce, AutoReload, Spread (Pairs) Trader
BNY Brokerage Citigroup Global Corporate and Investment Bank FlexTrade Systems Inc.
JPMorgan
Lehman Brothers
There should be study package enabled with the package so that user can learn about different options and usage information of the algorithm. Videos presence is strongly recommended which can teach the user about using the algorithm is different situations. Case studies in the form of simulations should be used as medium to guide the user more accurately about the usability of application of the algorithm in varying scenarios.
6. PROPOSED FRAMEWORK
The main purpose of the framework is to enhance the usability and penetration of the trading among the smaller investors. The framework is divided into four parts which forms the building blocks of the intelligent algorithmic trading. The four components of the framework are explained below.
2010 International Journal of Computer Applications (0975 - 8887) Volume 1 No. 21 few areas of concern need to be addressed before it becomes more widely accepted amongst the investing community.
8. REFERENCES
[1] Cliff Saran: Stock Exchange begins year-long testing program for new core trading system: Computer Weekly(2006). [2] S K Rao: Algorithmic Trading-Pros and Cons www.tcs.com/.../White%20Papers/TCS_FS_algorithmictrad ing.pdf [3] Sham M. Kakade, Michael Kearns, Yishay MansourLuis E. Ortiz: Competitive Algorithms for VWAP and Limit Order Trading,In: 5th ACM conference on Electronic commerce table of contents ,New York, USA,pp.189 198( 2004) [4] Cheuvreux, https://www.cheuvreux.com/pdf/Algo%20FactSheet_EU.pdf. [5] Efrat Manisterski, Raz Lin and Sarit Kraus: Understanding How People Design Trading Agents over Time: International Conference on Autonomous Agents archive ,In:e 7th international joint conference on Autonomous agents and multiagent systems, Estoril, Portugal,pp. 15931596(2008) [6] Toby Cole: Foreign Exchange Implications of Algorithmic Trading: Credit Suisse Securities (EUROPE) Limited(2007).
7. CONCLUSION
The trading algorithms are very important for emerging economies like India as number of small investors in our economy is too huge considering smaller brokerage firms and individuals investors. The algorithmic trading would be in great demand by the small investors once the human interaction of these algorithms would be enhanced which a great limitation of these algorithms presently worldwide. The framework would be greatly helpful in improving the acceptability, usability and penetration of these algorithms among the small investors and makes it more generic in nature. These algorithms can also be integrated in the present GUI of the brokerage firm present in India like Sharekhan.com and India bulls so that small investors would also be benefited by these algorithms advanced market prediction and analysis. The future work in this area is to implement the proposed framework in various algorithms available and measure its impact on the small investors. We are presently in process to implement this framework in varying situations which might takes some time sue to unavailability of resources, funding and complexity of the nature of problem. We have also presented a brief comparison of various trading algorithms like VWAP, TWAP and MOC. Algorithmic trading has had a profound impact on the way trading is done. It has led to globalization of markets and reduced transaction costs per stock. This has also resulted in increased trading volumes. There are tremendous growth opportunities in this form of trading but a
[7] Gsell, Markus, Johann Wolfgang: Assessing the impact of Algorithmic Trading on Markets : A simulation approach(2005) [8] Mobis Philipose: Indian markets slowly warming up to algorithmic trading: http://info.shine.com/Article/IndustryBuzz/Indian-markets-slowly-warming-up-to-algorithmictrading/2840/cid117.aspx [9] Goldman sachs enhances algorithm trading offering in India: http://gset.gs.com/cgibin/upload.dll/file.pdf?z0412210az2a2 59234840b4a57b03995d6191ecb07 [10] Dr. John Bates, Mark Palmer: Ten algorithmic trading trends in the lead-up to 2010 :Financial Intelligence Guide( 2006) [11] Algorithmic Trading Trends and Drivers: Tellefsen Consulting Group, Inc(2005) [12] Directory: Algorithm Trading, Wall street and tech((2004)