The High Frequency Game Changer by Paul Zubulake & Sang Lee

Author:Paul Zubulake & Sang Lee
Language: eng
Format: epub
ISBN: 9781118019689
Publisher: Wiley
Published: 2011-02-14T00:00:00+00:00

EXAMPLES OF ALGORITHMS

The act of sending an order for execution in an electronic marketplace is facilitated by algorithms. Not only are HFTs using them, but the majority of buy-side institutions employ them as well. There is a plethora of third-party vendors who supply algorithms as well as many sell-side brokers who develop their own for their customers. Some are complicated and others not, but trying to execute orders without any price slippage and information leakage is the goal.

The basic suite of algorithms that are readily available include the volume weighted price average (VWAP), timed order entry (TWAP), pegging to the bid or offer, and arrival price. There are many other types of algorithms that are slight derivations of the most used algorithms. The basic suite is used across the different asset classes. A description of these follows:

VWAP: This is computed from a beginning cut-off time to an ending cut-off time, and is calculated by volume weighting all transactions during this time period.

TWAP: The goal is to achieve the time-weighted average price calculated from the time you submit the order to the time it completes.

Pegging: A pegged order is designed to maintain a purchase price relative to the national best offer (NBO) or a sale price relative to the national best bid (NBB).

Arrival Price: This attempts to achieve the bid/ask midpoint price at the time the order is submitted, taking into account the user-assigned level of risk aversion which defines the pace of the execution, and the user-defined target percent of average daily volume.

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