06.04.07
Algorithmic Trading Models.
As the market becomes more Algo-based, here are some strategies that currently out in the market.
1. VWAP (Volume Weighted Average Pricing): This executes a buy order in a stock as close as possible to its historical trading volume in an effort to reduce the trade’s impact on the market. It is calculated by “($total_number_of_shares * $price)/$shares_traded_for_the_day”, so generally if $share_price < $vwap, its a deal, so the algo will execute a buy.
2. TWAP (Time Weighted Average Price): It trades based on the clock, allowing a trades to be sliced up over time. Good for illiquid stocks where volume analysis makes little sense.
3. Participation Strategies: this model trades on momentum. If there’s a particular interest in a stock, this algo will trade more aggressively and if there’s less trading going on, it will execute accordingly. Good for momentum traders, follow the money kind of trading. .
4. Guerrilla: This model was developed by CSFB that works orders without signaling the presence of a buyer or seller to the marketplace by slicing up big orders into smaller low key sizes. Credit Suisse’s AES (Advanced Execution Services) describes it as “using a variety of trading techniques to disguise its trail”.
5. Sniper: Another Algo from CSFB that will trade aggressively until it either completes or reaches arn investor’s limit price.
6. Sniffers: This is used to sniff out algo trading used by others. Its technique is aimed to find out other software that are trading and either work with or trade against them.
7. Dark Pools of Liquidity: private trading networks that don’t post prices. The buyers and sellers remain anonymous until trades are executed. It dissects brokers’ order books looking for better prices than are available on the exchanges or public trading networks. It will only record the trade after its been privately done.