Contents
Algorithmic Trading & DMA
An introduction to direct access trading strategies.By Barry Johnson
Page | |||
Preface | xiii | ||
Part I | An overview of trading and markets | 1 | |
1 | Overview | 3 | |
1.1 | Introduction | 3 | |
1.2 | Fundamentals | 5 | |
1.3 | Core execution methods | 6 | |
1.4 | Institutional trading types | 8 | |
1.5 | Electronic trading | 10 | |
1.6 | Algorithmic trading | 11 | |
1.7 | Direct Access Trading | 15 | |
1.8 | Comparing execution methods | 17 | |
1.9 | How much are these execution methods used? | 21 | |
1.1 | Fears and myths | 22 | |
1.11 | Summary | 25 | |
2 | Market microstructure | 27 | |
2.1 | Introduction | 27 | |
2.2 | Fundamentals | 28 | |
2.3 | Market structure and design | 30 | |
2.4 | Trading mechanism research | 39 | |
2.5 | Transaction cost measurement and analysis | 47 | |
2.6 | Summary | 51 | |
3 | World markets | 53 | |
3.1 | Introduction | 53 | |
3.2 | Asset classes | 54 | |
3.3 | Market structure | 58 | |
3.4 | Global market trends | 66 | |
3.5 | Global market comparison | 74 | |
3.6 | Summary | 78 | |
Part II | Algorithmic trading and DMA strategies | 81 | |
4 | Orders | 83 | |
4.1 | Introduction | 83 | |
4.2 | Market orders | 84 | |
4.3 | Limit orders | 85 | |
4.4 | Optional order instructions (Duration, session, fill, routing, linking etc.) | 88 | |
4.5 | Other order types (Hybrid, conditional, hidden, routed, crossing etc.) | 96 | |
4.6 | Summary | 112 | |
5 | Algorithm overview | 115 | |
5.1 | Introduction | 115 | |
5.2 | Categorising algorithms | 116 | |
5.3 | Common features of algorithms | 118 | |
5.4 | Impact-driven algorithms (TWAP, VWAP, POV etc.) | 119 | |
5.5 | Cost-driven algorithms (Implementation Shortfall etc.) | 132 | |
5.6 | Opportunistic algorithms (Price inline, liquidity-driven etc.) | 143 | |
5.7 | Other trading algorithms | 154 | |
5.8 | Summary | 160 | |
6 | Transaction costs | 161 | |
6.1 | Introduction | 161 | |
6.2 | The investment process | 162 | |
6.3 | Pre-trade analysis | 165 | |
6.4 | Post-trade analysis | 167 | |
6.5 | Breaking down transaction costs | 173 | |
6.6 | Transaction costs across world markets | 184 | |
6.7 | Summary | 186 | |
7 | Optimal trading strategies | 189 | |
7.1 | Introduction | 189 | |
7.2 | Assessing the difficulty of orders | 190 | |
7.3 | Selecting the optimal trading strategy | 192 | |
7.4 | Choosing between trading algorithms | 199 | |
7.5 | To cross or not to cross? | 211 | |
7.6 | Market conditions during the 2007-09 financial crisis | 213 | |
7.7 | A decision tree for strategy selection | 214 | |
7.8 | Summary | 217 | |
Part III | Implementing trading strategies | 219 | |
8 | Order placement | 221 | |
8.1 | Introduction | 221 | |
8.2 | Price formation | 222 | |
8.3 | Price discovery/Order matching | 226 | |
8.4 | Order placement decisions | 234 | |
8.5 | Dealing with hidden liquidity | 247 | |
8.6 | Estimating execution probability | 252 | |
8.7 | Summary | 254 | |
9 | Execution tactics | 257 | |
9.1 | Introduction | 257 | |
9.2 | Designing execution tactics | 258 | |
9.3 | Algorithm selection | 270 | |
9.4 | Summary | 275 | |
10 | Enhancing trading strategies | 277 | |
10.1 | Introduction | 277 | |
10.2 | Forecasting market conditions | 278 | |
10.3 | Estimating transaction costs | 292 | |
10.4 | Handling special events | 300 | |
10.5 | Summary | 309 | |
11 | Infrastructure requirements | 311 | |
11.1 | Introduction | 311 | |
11.2 | Order management | 312 | |
11.3 | Algorithmic trading | 322 | |
11.4 | Other requirements | 334 | |
11.5 | Summary | 337 | |
Part IV | Advanced trading strategies | 339 | |
12 | Portfolios | 341 | |
12.1 | Introduction | 341 | |
12.2 | Portfolio risk | 342 | |
12.3 | Transaction cost analysis for portfolios | 351 | |
12.4 | Optimal portfolio trading | 352 | |
12.5 | Portfolio trading with algorithms | 360 | |
12.6 | Summary | 367 | |
Addendum A: Covariance | 369 | ||
13 | Multi-asset trading | 371 | |
13.1 | Introduction | 371 | |
13.2 | Multi-asset trading strategies | 372 | |
13.3 | Utility strategies (FX cash trades, covering shorts) | 374 | |
13.4 | Structured strategies | 374 | |
13.5 | Hedging strategies (Beta, duration, gamma/delta) | 375 | |
13.6 | Arbitrage strategies (Basis, index, ETF, futures and option) | 383 | |
13.7 | Adapting algorithms for multi-asset trading | 397 | |
13.8 | Summary | 400 | |
14 | News | 401 | |
14.1 | Introduction | 401 | |
14.2 | Types of news | 401 | |
14.3 | The changing face of news | 404 | |
14.4 | Computerised news handling techniques | 409 | |
14.5 | Market reactions to news | 416 | |
14.6 | Incorporating news into trading strategies | 432 | |
14.7 | Summary | 437 | |
15 | Data mining and artificial intelligence | 439 | |
15.1 | Introduction | 439 | |
15.2 | Data mining | 440 | |
15.3 | Artificial Intelligence | 448 | |
15.4 | Incorporating in trading strategies | 461 | |
15.5 | The future | 468 | |
15.6 | Summary | 469 | |
Epilogue | 471 | ||
Appendices | 473 | ||
A | Equity markets | 474 | |
B | Fixed income markets | 495 | |
C | Foreign exchange markets | 504 | |
D | Money markets | 509 | |
E | Derivatives markets | 515 | |
F | Other markets | 534 | |
Abbreviations & Acronyms | 543 | ||
References | 545 | ||
Index | 569 |