Wall Street Algorithmic Trading, And Electronic Frontrunning.

From Greg M.

Lions and friends. What I have included here below is from a section of my book, A Not So Random Walk On Wall Street, (beginning on page 42), which I believe that you will find interesting…

Wall Street Algorithmic Trading.

Algorithmic trading systems execute orders using an automated, programmed set of variables based on technical analysis. We will cover technical analysis in the next section. It certainly is no secret that many Wall Street institutions utilize an algorithm to execute trades. Algorithms are programs run by computer software which execute trades when specific parameters are triggered. These “algos” are proprietary and unique from one institution to another, moreover, the parameters used to trigger trades changes randomly. Major financial institutions algorithms execute trades after triggering specific parameters, these parameters are programmed to change at random. The reason why algorithm parameters change at random is to not allow the proprietary algorithm to have its codes broken. Institutional algorithms are not to be feared and are not always right either. Financial institutions who do utilize algos are competing against each other, and not traders like you or me. It is also interesting to know that major financial institutions pay a lot of money to have their computer servers placed as close to an exchange as possible, here is why. Today trades are placed at incredible speeds, and if for example a financial institution can have their trades placed first, even by milliseconds, it gives them a financial advantage. A financial institution having its servers placed closer, or even in an exchange, gives that institution a trade execution speed advantage, but it gets even better! Another reason why a financial institution wants to have its servers placed as close to an exchange as possible is this, electronic trading frontrunning. Financial institutions who by having their servers as close as possible to an exchange can also use another type of software, a program which tracks trades being placed and then jumps in front of the trade. The practice of having software which recognizes when a trade is executed and is then able to jump in front of that trade is called electronic frontrunning. High-frequency trading, (HFT) utilizes computer algorithms to perform large numbers of trades in fractions of a second. HFT systems are positioned as close to an exchange as possible allowing the fastest possible execution speeds. HFT is used to front run trades at incredible speeds by institutional investors who are competing against other institutions, and not traders like you or me.

GM