Channels ▼


Algorithmic Trading

John is the founder and Vice President of Apama Products, Progress Software.

Anyone with a computer science background is familiar with the concept of algorithms for tasks such as the searching or sorting of data. However, what about algorithms that specify a sequence of steps to make money in the capital markets? That's exactly what the latest excitement around "algorithmic trading" is all about.

In the algorithmic trading space, an "algorithm" describes a sequence of steps by which patterns in real-time market data can be recognized and responded to in order to detect trading opportunities and place and manage orders in the market. The term "algorithmic trading" has only become commonly used within the financial sector over the past few years—although trading algorithms have been around for longer. Historically, large investment banks have deployed armies of Ph.D.s to custom build trading algorithms. Now, an advanced technology approach called "Complex Event Processing" (CEP) is making it much quicker and easier to build, deploy, and manage trading algorithms, with fewer personnel necessary.

What Do Algorithms Replace?

Before the days of automated algorithms within the financial markets, traders manually carried out the process of building and managing a trading strategy. Sitting at specialized trading stations, with four or eight screens, traders watched as real-time market data changed. By manually tracking analytics and patterns, possibly in a spreadsheet, traders worked out when and where to place orders into the market and then managed these orders to see if they were fulfilled. The trader understood the workings of the algorithm, but each step was a manual process. Now, apart from initiating a particular algorithm, the trader does not have to be involved at all. In most cases, the trader will monitor the algorithms using a graphical dashboard. In fact, a trader can now initiate and manage hundreds, or even thousands, of independent algorithms—as opposed to doing one thing at a time manually. This way, the trader is scaled to become much more productive. However, as will be discussed later in this article, the algorithm doesn't replace the trader. It is the trader and his or her team of quantitative analysts who devise new algorithms and tailor existing ones.

Related Reading

More Insights

Currently we allow the following HTML tags in comments:

Single tags

These tags can be used alone and don't need an ending tag.

<br> Defines a single line break

<hr> Defines a horizontal line

Matching tags

These require an ending tag - e.g. <i>italic text</i>

<a> Defines an anchor

<b> Defines bold text

<big> Defines big text

<blockquote> Defines a long quotation

<caption> Defines a table caption

<cite> Defines a citation

<code> Defines computer code text

<em> Defines emphasized text

<fieldset> Defines a border around elements in a form

<h1> This is heading 1

<h2> This is heading 2

<h3> This is heading 3

<h4> This is heading 4

<h5> This is heading 5

<h6> This is heading 6

<i> Defines italic text

<p> Defines a paragraph

<pre> Defines preformatted text

<q> Defines a short quotation

<samp> Defines sample computer code text

<small> Defines small text

<span> Defines a section in a document

<s> Defines strikethrough text

<strike> Defines strikethrough text

<strong> Defines strong text

<sub> Defines subscripted text

<sup> Defines superscripted text

<u> Defines underlined text

Dr. Dobb's encourages readers to engage in spirited, healthy debate, including taking us to task. However, Dr. Dobb's moderates all comments posted to our site, and reserves the right to modify or remove any content that it determines to be derogatory, offensive, inflammatory, vulgar, irrelevant/off-topic, racist or obvious marketing or spam. Dr. Dobb's further reserves the right to disable the profile of any commenter participating in said activities.

Disqus Tips To upload an avatar photo, first complete your Disqus profile. | View the list of supported HTML tags you can use to style comments. | Please read our commenting policy.