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Algorithmic Trading Strategy


 Algorithmic trading (also called automated, algo, and black box trading) is a term describing the use of computer software programmes to initiate trades in electronic financial markets based on sets of algorithms. These programmes are extremely beneficial to trading firms in many ways, specifically that the algorithmic trading software is fed with live data and is able to analyze that data before a human trader is even aware that that new information is available.

There has been a vast array of algorithms developed across financial markets in order to achieve different trading strategies. It is very important to know not only about algorithmic trading, but also the strategies that are implemented using algorithmic computer software.

One such strategy is basic arbitrage. In this strategy the software programmes may be looking at several things including interest rate parity in the foreign exchange market. Here, the algorithm will look at market inefficiency, when several different purchases are based on the same numbers but the interest rates don't match up. Another strategy is transaction cost reduction. In this the software analyzes ways to break down large transactions into several smaller ones over time in order to get the best possible price. Then there is market making, which is the act of offering to buy at below market price or offering to sell above market price in order to benefit from that spread.

There are many more complicated strategies implemented by algorithmic trading software. “Benchmarking” attempts to mimic indices’ returns; “sniffers” detect volatile and unstable markets; then of course there are “gamers”. “Gaming” is any type of algorithmic trading that depends on the programming of other algo traders. Essentially what these gamers are trying to do is discover “icebergs” (the large trades that have been broken down to reduce transaction cost) and trade based on gaining from those large orders coming through over time.

Algorithmic trading is often done in-house but many smaller firms use external hosts (such as the Kyte Group) to host their algo operations in remote state of the art server suites. No matter how it is being done it is a necessary tool to be successful in today’s financial market, and even when a company cannot house equipment for these solutions an external host is a great solution in order to actively utilize these algorithmic trading strategies.



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The Kyte Group Limited was founded by David Kyte in 1985 on LIFFE, the embryonic futures exchange in the heart of the City of London.
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