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Automated Trading Sysytems

September 2010

Automated trading systems have the potential to improve the results of an existing trading strategy, and most traders would benefit from understanding the reasons behind this. Automated trading, also known as algorithmic trading, algo trading, grey-box trading, or black-box trading, is the use of computer programs to implement a specific trading strategy when a pre-defined set of market conditions are met without human intervention. A special class of algorithmic trading is “high-frequency trading.” Like all automated trading, computers make decisions to initiate orders and close trades based on market data before human traders are capable of processing the information they observe. The big difference between “high frequency trading” and other types of automated trading is the number of trades taking place. “High-frequency trading” algorithms can generate thousands of orders per second.

Automated trading strategies are implemented most efficiently utilizing sophisticated technology with collocated servers that have direct exchange access. One of the major advantages of automated trading systems (ATS) is that they allow you to harness the processing power of your computer to quickly identify and react to trading opportunities. An ATS can track numerous markets simultaneously, to a degree not possible with the naked eye. The number of markets a human can monitor is limited: they cannot look at everything and cannot analyze 24/7. Automated trading systems are able to do this, allowing traders to trade a large variety of markets and products. Another benefit of using an ATS is that it reduces emotional interference and increases trading discipline.

Traders who use automated trading systems can be separated into three groups. First, there are those traders who use “off-the-shelf” automated software (i.e. TT Autospreader or Stellar Spreadmachine). Second, there are traders whose strategies require low latency connectivity; these traders typically have servers colocated to minimize latency on their trade executions (i.e. Grey-box ATS, TT ASE or CQG Spreader). Third, there are traders who have a need for even faster execution speeds and write directly to the exchange which would require FIX certification from the exchange (i.e. Black- box ATS). This style of trading has grown exponentially over the past few years and can prove to be very lucrative if the right strategies are employed. Each of these trading styles can maximize their potential with better technology implementation.

Traders can improve the performance of their ATS strategies by ensuring they employ optimal hardware and software configurations. Configuring all equipment for the appropriate software is critical to optimize its performance. Hardware and software optimization is central to maximizing performance during peak market conditions. “Extra bells and whistles that come pre-loaded with factory installs from hardware vendors can have a negative impact on performance”, says Ambaj Sharma, Senior Vice President of Information Technology. In addition to choosing optimal hardware and software, proper connectivity and maintenance are extremely important variables that can make the difference between profitable and unprofitable trading.

Colocation can greatly benefit traders who are running automated trading systems whether it be grey-box or black-box. Taking advantage of colocation brings the trader’s strategy as close to the exchange matching engine as possible. Proximity solutions are key to algorithmic trading as execution times are reduced and the risk of multiple points of failure are eliminated. With remote access to their server(s), traders have the freedom to trade quickly and confidently from anywhere around the globe.

Advantage Futures is staffed and positioned to assist clients with the analysis and implementation of their technology needs. Speak with your client service representative today to learn how you can better implement automated trading strategies into your trading operation.

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Related topics: From The Inside, Newsletter, Uncategorized