Man vs.MachineWhat is Auto-Trading?

AttentionManipulation

“Goldman had engineered every

major market manipulation

since the Great Depression -

and they’re about to do it again”

Rolling Stone, May 2009

May 2009 a former computer programmer at theirWall Street headquarters had been charged withusing sensitive computer codes to steal tradesecrets. The codes are core to Goldmans'algorithmic trading systems.

The bank's lawyer made the statement that this

“raised the possibility that there is a danger

that somebody who knew how to use this

program could use it to manipulate markets in

unfair ways.”

“A computer-implemented system and method for

executing trades of financial securities according to a

combination passive/aggressive trading strategy that

reliably executes trades of lists of securities or blocks

of a single security within a desired time frame while

taking advantage of dynamic market movement to

realize price improvement for the trade within the

desired time frame. A passive trading agent executes

trades at advantageous prices by floating portions of

the order at the bid or ask to maximize exposure to the

inside market and attract market orders. An aggressive

agent opportunistically takes liquidity as it arises,

setting discretionary prices in accordance with

historical trading data of the specified security.”

FACTS

26% EXECUTED

BY NYSE

Exchange that doesn't have to report WHO

is trading and HOW MUCH they are trading

10 PUBLIC EXCHANGES

30 DarkPools

200+ internalising broker-dealers

Is this BAD News for us?

Traders will lose

their account

within 1 year

Of People will

be profitable by

themselves

95% 5%<

The Likely Conclusion for the Majority

YOU are the problem

★ YOU are holding you back

Remove YOU as the problem

★ YOU always will be

★ The industry is against you

★ YOU shouldn't be doing

the trading

How it WorksInvestors connect their computers to trading systems

known as electronic communication networks (ECN).

‣ Electronic Broking Systems

‣ Multi-bank Trading system

‣ Single bank Trading systems

Once connected, a

computer algorithm

monitors price quotes

from different ECNs

and places orders - all

without immediate

manual interaction.

TERMS Algorithmic

Black Box

Program

Robot

QuantitativeHFT

WHAT AN

ALGORITHM DOES

TELLS the trader EXACLY when to enter a position

TELLS the TRADER how much to buy or sell

TELLS the TRADER whether to sell short or buy long

TELLS the TRADER when to exit the position

i

i

i

i

Auto-Hedging

A formula automatically

generates hedging orders for

managing risk levels

dynamically.

Statistical Trading

Orders are generated according

to algorithms designed around

macro portfolio models or

differentials to relative values.

Liquidity Access

Trading solutions are

designed to improve access

to multiple trading venues.

Algorithmic Execution

Trading styles are automated to

keep execution controlled and

running smoothly.

1 2

3 4

Auto-Hedging

A formula automatically

generates hedging orders for

managing risk levels

dynamically.

Statistical Trading

Orders are generated according

to algorithms designed around

macro portfolio models or

differentials to relative values.

Liquidity Access

Trading solutions are

designed to improve access

to multiple trading venues.

Algorithmic

Execution

Trading styles are automated to

keep execution controlled and

running smoothly.

Four Categories of Algorithmic Trading

0

15

30

45

60

Others High - Frequency Trading

Institutional Hedge Found

Retail

Prevalence

1%

56%

17%15%

11%

%

%

%

%

‣ Optimisation

‣ Robustness

TESTING

Systems

Infrastructure

Data

Markets

http://murraypriestley.com/