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