This month’s Wall Street and Technology came with a nice add on print - the 2006 Traders Glod Book (*Marc tell your neighbor - nice work*). They spoke to several directors of trading desks around the world and asked IT related questions and more. In general - fascinating…

One of the interesting areas was asking how they are using algorithms, whose they are using, on what instruments, do they develop their own, etc. As it goes, there are several ‘pet algorithms’ that seem to me mentioned by everyone. Not surprisingly the old standard VWAP is still the norm, everyone uses it. Implementation Shortfall, and TWAP are the other standards that are used in lots of places.

There is a good overview of what exactly these algorithms are. I found this great paper that gives a clear explanation of the different algos, their usages and general characteristics. I have used VWAP for several trading systems in the past - it is par for the course you could say. TWAP (Time weighted average price, as opposed to VWAPs Volume … ) is related but the Shortfall and First Arrival Price algorithms were new to me.
I will also say that CSFB’s AES algorithm set gets an honorable mention as it was noted by several people. The big players all seem to have offerings - I am curious to see how they all pan out.

Something that I find interesting also is that these are all ‘what price’ algorithms, not ‘what order’ algorithms. All of these algorithms assume you want to be in the market - they are about getting the right price. They are more like execution algorithms. This is why they are used all over the place sort of interchangeably. You say ‘I have an order that I want - go get it’. The algorithms then goes to do it’s thing and get you the ‘correct’ price without giving away the notion that you are selling/ buying N tradeables in the market. This is of course mandatory, useful etc. All of my ‘algorithmic trading’ experience has been in the ‘what order’ space, with some ‘what price’ component. The ‘what order’ part got a lot more attention, but I could see how as a non-institution I and my clients in the past have been more cavalier about just executing a trade. As an institution, you cannot do that- you can’t dump 2 billion into the market in 1 shot :).

-There are my musings for this evening-

Chris

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