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The title of this post (and the WSJ article) is potentially misleading. The 'Algorithm Trade' referenced was a Mutual Fund company executing a very large sell

by fr0sty 16y ago

The title of this post (and the WSJ article) is potentially misleading. The 'Algorithm Trade' referenced was a Mutual Fund company executing a very large sell order in E-mini Futures. The sell order was executed through a trading algorithm which attempted to participate in 9% of market volume. Many people associate 'Algorithmic Trading' with 'High-Frequency Trading' but there is no link made by the report. ETA: An equally correct headline could be "Large Institutional Seller set off May 6 flash crash.

wglb 16y ago
Now you have me confused. Algorithmic Traders are quite a different species than High-Frequency Traders. How did the article conflate these?
- fr0sty 16y ago
  It is the popular imagination conflates them... 1. High-Frequency trading, by definition, done by algorithms. 2. We hear rumors or storyies of Algorithms gone wild. 3. This report blames and 'Algorithmic Trade' as the cause. People are tempted to 'connect-the-dots' and would likely end up with an erroneous conclusion.
  - DannoHung 16y ago
    High-Freq is usually the label used for prop trading. Algo is usually the label used for agency trading. The differences between the algos used isn't really pertinent.
    - lrm242 16y ago
      The differences are huge. The motiviations behind each are entirely separate. They are used by different people for different things. A day trader, slogging it out in front of their computer every day is very different from a floor broker trying to execute customer orders. That is the fundamental difference we're talking about here. Unfortunately, any time the markets are mentioned in connection with algorithm people instantly think "high-frequency trading", and most often they are wrong.
- lrm242 16y ago
  In the industry algorithmic trading does not equal trading with algorithms. Algorithmic trading is typically used by sell-side firms to place large orders into the market. The algorithmic part comes from how the computer places the orders. The algorithms are used to benchmark the order placement against some known value, for example two common algorithms are Volume Weighted Average Price (VWAP) and Time Weighted Average Price (TWAP). The sell side wants to get the order into the market and by using algorithms they want to reduce the impact that order has on the price. By doing this, they can fill the client order at a better average price than if they just simply placed a large market order to buy or sell. Algorithmic trading, as described above, is not high-frequency trading. They are not remotely similar. Just because computers are used to manage the order flow into or out of the market does not mean they are related. It is important to note that the conclusions here are very close to what the gut reaction of the market was the day of and after the event. A fat fingered order. This is the algorithmic execution equivalent of a fat fingered order. The order, which was huge, hit the market too quickly and didn't manage its impact. Whether there should be rules to stop this from happening again who knows, but the theories around computers fighting it out and high-frequency firms manipulating the market have been clearly deemed false.
beagle3 16y ago
Said seller did 2.5% of daily average, and did it slowly. That triggers a crash all on its own. And we're supposed to believe that the SEC has any idea what's happening.

by fr0sty 16y ago

wglb 16y ago

Now you have me confused. Algorithmic Traders are quite a different species than High-Frequency Traders. How did the article conflate these?

fr0sty 16y ago
It is the popular imagination conflates them... 1. High-Frequency trading, by definition, done by algorithms. 2. We hear rumors or storyies of Algorithms gone wild. 3. This report blames and 'Algorithmic Trade' as the cause. People are tempted to 'connect-the-dots' and would likely end up with an erroneous conclusion.
- DannoHung 16y ago
  High-Freq is usually the label used for prop trading. Algo is usually the label used for agency trading. The differences between the algos used isn't really pertinent.
  - lrm242 16y ago
    The differences are huge. The motiviations behind each are entirely separate. They are used by different people for different things. A day trader, slogging it out in front of their computer every day is very different from a floor broker trying to execute customer orders. That is the fundamental difference we're talking about here. Unfortunately, any time the markets are mentioned in connection with algorithm people instantly think "high-frequency trading", and most often they are wrong.
lrm242 16y ago
In the industry algorithmic trading does not equal trading with algorithms. Algorithmic trading is typically used by sell-side firms to place large orders into the market. The algorithmic part comes from how the computer places the orders. The algorithms are used to benchmark the order placement against some known value, for example two common algorithms are Volume Weighted Average Price (VWAP) and Time Weighted Average Price (TWAP). The sell side wants to get the order into the market and by using algorithms they want to reduce the impact that order has on the price. By doing this, they can fill the client order at a better average price than if they just simply placed a large market order to buy or sell. Algorithmic trading, as described above, is not high-frequency trading. They are not remotely similar. Just because computers are used to manage the order flow into or out of the market does not mean they are related. It is important to note that the conclusions here are very close to what the gut reaction of the market was the day of and after the event. A fat fingered order. This is the algorithmic execution equivalent of a fat fingered order. The order, which was huge, hit the market too quickly and didn't manage its impact. Whether there should be rules to stop this from happening again who knows, but the theories around computers fighting it out and high-frequency firms manipulating the market have been clearly deemed false.

beagle3 16y ago

Said seller did 2.5% of daily average, and did it slowly. That triggers a crash all on its own. And we're supposed to believe that the SEC has any idea what's happening.