Dou Akdeniz niversitesi Faculty of Business and Economics Department of Banking and Finance

Markets Technical Analysis

and
Algorithmic Trading

Algorithmic Trading
( Automated Trading Systems )

and

High Frequency Finance

Saeed Ebrahimijam
FINA417
FALL 2013-2014

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 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

Automated Trading Systems

Human s need to rest !!!!

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 .

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. %obot trading can work 24 hours a day without affecting their effectiveness. &motionless and strict adherence to a programmed algorithm .

Help you as expert consultant

Trade instead of you

!enefits of automated trading

'hen 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

&motion management system - 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 F$%&( market

Automated trading systems in the world financial markets :

As of the year 2010 more than 70% of the stock shares traded on the ")S& and "AS*A+ are generated from A third of all &uropean ,nion stock trades in 2006 were driven by automatic programs, or algorithms. In 2006 at the -ondon Stock &xchange , over 40%

'here 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 &lectronic trading platform *ay 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 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 potentialSharpe ratio thousands of times higher than the traditionalbuy-and-hold strategies. * As of 2009, 60-73% of all ,S equity trading volume. High-frequency trading strategies

* Aldridge, Irene (July 26, 2010)."How "r#ding"Hu!!ing"on )o%".

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Definition of 'High-Frequency Trading - HFT'

' program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. Highfrequency 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 is estimated more than -)4 of exchange volume comes from highfrequency trading orders.
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 #!$%s&, which attempt to add competition and liquidity for existing quotes on the exchange. 's an incentive to the firm, the N !" pays a fee or rebate for providing said liquidity. 's of ())*, the !$% 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.

TI / *ATA

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 information , such as the actual numerical value of the price, available volume, or si#e

-A timestamp records the date and time at which the quote originated. - the number of observationsin a single day of tick -by -tick data is equivalent to 30 y ears of daily observations.

Implementing High -Frequency Trading Systems

/ey Steps in Implementation of High -Frequency Systems

%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.

%eal-time data for the first 10 seconds of trading in Apple (AA0-) starting at 930 a.m. Eastern on Wednesday, July 25, the first chance the full "AS*A+ had to react to Apple's disappointing + 3 earnings report .

Available software (platforms )

Intelli hart 0ro harts Tradestation &signal Metastock 'ealth--ab Amibroker 1T Trader "eoTicker "in.aTrader MetaTrader

Meta Trader software

Manually trading

Auto trading

M+- compiler

M+- tasks
reate your own technical analysis indicators of any complexity ,se Auto-trading : expert advisor (&A) to work on various financial markets *evelop your own analytical tools based on mathematical achievements and traditional methods 'rite information trading systems for solving a w ide range of tasks (trading, monitoring, alerting, etc.)

Strategy Tester
0rogrammers can test their automated trading sy stems on historical or current market data in order to determine w hether the underly ing algorithm guiding the sy stem is profitable or not . !ack - testing software are special trading platforms w hich enable trading sy stem designer to develop and test their trading systems on historical market data while aiming to produce optimal historical results.

Strategy Tester