Algorithmic, Electronic, and Automated Trading

Abstract

Many novel techniques have found prominence in empirical finance and particularly in algorithmic trading, yet there is a distinct lack of a comprehensive primer to this vast, dynamic field. This article highlights key concepts, terminology, and phenomena within algorithmic trading. We commence by analyzing and detailing market participation over the past few decades. We provide a thorough treatment of the trading mechanisms, forecasting and prediction, regulatory reform, and liquidity provisions that have brought about algorithmic trading. We further describe some of the common strategies used by high-frequency traders, providing a concrete example to codify the theory. We also describe the technological development fundamental to this trading paradigm. This article serves as a basic review of algorithmic trading microstructure and equips the reader with a coherent understanding of markets, algorithmic trading, and technology alongside associated challenges.