Electronic Markets and Trading Algorithms

Abstract

Academics attempt to understand the consequences of fragmentation, electronic markets, and trading algorithms. Practitioners, by necessity, devise ever-improving trading algorithms to achieve their trading objectives. This article is a bridge of sorts. The author uses the structural approach developed throughout decades of research on price formation to illuminate modern electronic-trading practices and algorithms. He argues that despite the constantly changing trading landscape driven by tech nology improvements, the economic trade-offs embedded in trading algorithms are, for all intents and purposes, not different from manual trading. All that has changed is the implementation.

TOPICS: Exchanges/markets/clearinghouses, statistical methods, risk management