Straight Talk with an Algorithmic Trader
I bring to your attention the translation of the article "A Candid Discussion with an Algorithmic Trader" from the website quantinsti.com ).
The role of the algorithm in a person’s life is too significant to be ignored. From the simple procedure of using a coffee machine to the music system in your car, from elevators to search engines such as Google - all of this is controlled by a set of logical instructions - Algorithms that allow us to meet our specific needs.
With the advent of the Internet, the potential of algorithms has proven itself in its true power. Determining trends, identifying preferences with the help of social networks and targeting relevant groups to specialized services - all this has become possible with the help of modern sophisticated algorithms.
Of course, against the background of all this technical progress, stock markets were at the forefront of adapting to the exciting world of algorithms. Algorithmic trading is gradually becoming the most preferred way to trade on the stock exchanges, accounting for about 80% of the total trading volume on Wall Street. Institutional investors, hedge funds and large financial brokerage companies have switched to algorithmic trading in order to remain competitive, cost-effective and meet the interests of their clients.
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So, what is algorithmic trading or, as it is also called, “Black Box Trading”? Do you need the skills of a professional programmer to succeed in algorithmic trading? What investments are needed to create a workplace for an algorithmic trader? These are just some of the questions that I thought about, thinking about a transition to a career in algorithmic trading.
Full information openness: I am new to algorithmic trading. To look at the topic, I looked at several forums on financial mathematics and algorithmic trading, but the discussions there only confirmed my incorrect and inadequate understanding of the subject. So, I began to talk with some experts in this field in order to understand its pros and cons. I must confess that this is the safest way to explore the myths that have developed around the utility of algorithmic trading.
In the process of saturating my hunger for knowledge, I researched a number of sources, some of which cited these operating manuals, while others suggested marketing tricks. My search finally ended after a casual conversation with some quantitative analysis specialists and high-frequency trading from iRage Capital, one of the leaders in algorithmic trading in India. iRage Capital was founded in 2009 and has since become respected in the Indian algorithmic trading market.
Below are some excerpts from the conversation.
Me: The world of algorithmic trading still remains a mystery to many people, probably due to the high demands on the mathematical preparation of participants. Can you show us what is left behind the scenes when installing the workplace of an algorithmic trader?
Expert: I think the mystery of algorithmic trading is exaggerated. Algorithmic trading is a fairly simple process of using a set of instructions for placing bids to buy or sell stocks with volumes and speeds that are not possible for a person. The instruction set is based on various market indicators, such as price, time, volume, and any other user-preferred indicators. In algorithmic trading, it is good that it excludes human intervention, thereby leveling the role of emotions and intuition.
A typical architecture of an algorithmic system has three main components - (a) Market Data Handler (b) Strategic module (c) Application Router. The market data handler, as the name implies, receives the data in the market and stores them. Trading strategies, in the form of a mathematical model, are submitted to the Strategic Module. It also serves as a link between the market and the trader. The router (or manager) of applications sends a request back to the exchange for making a purchase / sale.
To install the workplace of an algorithmic trader, you need to place your servers in the immediate vicinity of the exchange, download strategies to your system, after you test and check them on historical data, set up a good Internet connection and you can go!
I: Good. Now it does not seem so "mysterious." Given that I had some knowledge of algorithmic trading or financial mathematics, give me advice, how could I try my hand in this area?
Expert: Well, firstly, the most important step is to create a solid base. Learn some programming skills and learn how markets work. The ability to handle numbers well always helps. Start by learning basic subjects such as statistics and econometrics. Some books, such as Algorithmic Trading from Ernest Chan or Larry Harris 's Trading and Exchange, can help you create the right algorithmic trading system. When you are done with the above steps, get into the practical development of building strategies, modeling techniques, and statistical tools. Master the various paradigms of trading strategies , such as statistical arbitrage, execution strategies, the difference between the prices of the seller and the buyer. There are several free courses available on the web at Udemy and Udacity that are very good for probing the ground. There are other paid and advanced courses available for serious learners.
I: Great! You talked about programming languages. Which ones are often used by traders?
Expert: C ++ is most preferable, as long as high-frequency trading (HFT) will remain relevant. The reason is that memory leaks and related errors have much less space in C ++ than in other languages. Python was designed mainly for programming strategies and testing based on historical data, because it is easier to learn and supports good scientific libraries such as Numpy. A number of forums today discuss investment and trading strategies programmed in Python.
Me: How do individual participants in algorithmic trading feel? It seems to me that the price of entry is too high for them to allow themselves to participate in algorithmic trading.
Expert: The cost of participating in algorithmic trading is certainly higher than in the case of a traditional trading terminal. Placing servers on the exchange can be expensive. According to the latest statistics, almost 70-80% of trade on Wall Street is carried out with the help of robots, mainly by large institutional investors and hedge funds. However, opportunities for individual participants are evolving with the advent of web-based platforms. For someone who is not too concerned about the delay, they have a certain charm. In addition, companies such as Interactive Brokers provide individual clients with an application programming interface and software packages, so that traders can program their own trading strategies and methods. Having mastered them, it will be no more difficult to log in to your account on Gmail. You log into your account, test your strategy, test it on historical data, and, after optimization, trade in real markets. It is also strongly recommended to try to trade "on paper" or on the simulator.
Me: How do you assess the general attitude towards algorithmic trading in India? Are companies willing to choose algorithmic trading, given its niche category and the need to attract highly qualified practitioners?
Expert: Algorithmic trading was authorized by the Indian Council of Securities and Exchange Commission in 2008. During these 8 years, about 50% of trade volumes or even more have been carried out using algorithmic trading. This indicates its popularity. Indian stock exchanges are very well adapted to change, constantly increasing the number of active participants. Both foreign and local investments use algorithmic trading to place orders on the exchanges.
Me: What does the future look like on a global scale?
Expert: Very promising, in fact. It is clear that the future of automation, it moves the world. In any field, automation makes a tectonic shift away from the traditional path and the same applies to the stock market. In the US markets, 70-80% of volumes pass through automated systems. Emerging markets, such as India, are seeing exponential growth in this area. Of course, markets evolve every day, so trading costs will decrease from a certain point onwards. A good illustration is the automotive industry, where, after the introduction of robots, they initially thought that the industry could not progress because of the high cost of capital.
Me: Since you have been involved in algorithmic trading for a long time, could you list some of the biggest lessons she has taught you?
Expert: They are, in fact, quite small. The most important of these is that it is not enough to have a good trading strategy, you also need to have a competitive advantage. It can range from innovative ideas to low commissions or markets to which you have access, but you should always have some kind of killer plan if you plan to be successful. Think of it like any ordinary business where you must develop a strategy to outwit your competitors. For any person starting a new business, it is important to understand the nuances of trade.
Me: Cool! Thank you for your ideas. They really helped to dispel some doubts about algorithmic trading. Can you tell me what my next step should be if I want to understand more in this area?
Expert: The best way is to find experts and authorities in this field, talk with them and discuss your doubts. Try freely available tools and resources on the Internet. Be ready to accept new knowledge and learn new skills!
To discuss algorithmic trading with authority in this area, you can join the “Informative Session on Algorithmic Trading” with Mr. Nitesh Handelwal, co-founder of iRage Capital Advisory Pvt Ltd , a leader in algorithmic and high-frequency trading in India. With a wealth of experience in world markets and an understanding of the business environment, Nitesh spoke at events in various exchanges in South-East Asia, conveying his understanding of algorithmic trading.
The role of the algorithm in a person’s life is too significant to be ignored. From the simple procedure of using a coffee machine to the music system in your car, from elevators to search engines such as Google - all of this is controlled by a set of logical instructions - Algorithms that allow us to meet our specific needs.
With the advent of the Internet, the potential of algorithms has proven itself in its true power. Determining trends, identifying preferences with the help of social networks and targeting relevant groups to specialized services - all this has become possible with the help of modern sophisticated algorithms.
Of course, against the background of all this technical progress, stock markets were at the forefront of adapting to the exciting world of algorithms. Algorithmic trading is gradually becoming the most preferred way to trade on the stock exchanges, accounting for about 80% of the total trading volume on Wall Street. Institutional investors, hedge funds and large financial brokerage companies have switched to algorithmic trading in order to remain competitive, cost-effective and meet the interests of their clients.
')
So, what is algorithmic trading or, as it is also called, “Black Box Trading”? Do you need the skills of a professional programmer to succeed in algorithmic trading? What investments are needed to create a workplace for an algorithmic trader? These are just some of the questions that I thought about, thinking about a transition to a career in algorithmic trading.
Full information openness: I am new to algorithmic trading. To look at the topic, I looked at several forums on financial mathematics and algorithmic trading, but the discussions there only confirmed my incorrect and inadequate understanding of the subject. So, I began to talk with some experts in this field in order to understand its pros and cons. I must confess that this is the safest way to explore the myths that have developed around the utility of algorithmic trading.
In the process of saturating my hunger for knowledge, I researched a number of sources, some of which cited these operating manuals, while others suggested marketing tricks. My search finally ended after a casual conversation with some quantitative analysis specialists and high-frequency trading from iRage Capital, one of the leaders in algorithmic trading in India. iRage Capital was founded in 2009 and has since become respected in the Indian algorithmic trading market.
Below are some excerpts from the conversation.
How to get started
Me: The world of algorithmic trading still remains a mystery to many people, probably due to the high demands on the mathematical preparation of participants. Can you show us what is left behind the scenes when installing the workplace of an algorithmic trader?
Expert: I think the mystery of algorithmic trading is exaggerated. Algorithmic trading is a fairly simple process of using a set of instructions for placing bids to buy or sell stocks with volumes and speeds that are not possible for a person. The instruction set is based on various market indicators, such as price, time, volume, and any other user-preferred indicators. In algorithmic trading, it is good that it excludes human intervention, thereby leveling the role of emotions and intuition.
A typical architecture of an algorithmic system has three main components - (a) Market Data Handler (b) Strategic module (c) Application Router. The market data handler, as the name implies, receives the data in the market and stores them. Trading strategies, in the form of a mathematical model, are submitted to the Strategic Module. It also serves as a link between the market and the trader. The router (or manager) of applications sends a request back to the exchange for making a purchase / sale.
To install the workplace of an algorithmic trader, you need to place your servers in the immediate vicinity of the exchange, download strategies to your system, after you test and check them on historical data, set up a good Internet connection and you can go!
I: Good. Now it does not seem so "mysterious." Given that I had some knowledge of algorithmic trading or financial mathematics, give me advice, how could I try my hand in this area?
Expert: Well, firstly, the most important step is to create a solid base. Learn some programming skills and learn how markets work. The ability to handle numbers well always helps. Start by learning basic subjects such as statistics and econometrics. Some books, such as Algorithmic Trading from Ernest Chan or Larry Harris 's Trading and Exchange, can help you create the right algorithmic trading system. When you are done with the above steps, get into the practical development of building strategies, modeling techniques, and statistical tools. Master the various paradigms of trading strategies , such as statistical arbitrage, execution strategies, the difference between the prices of the seller and the buyer. There are several free courses available on the web at Udemy and Udacity that are very good for probing the ground. There are other paid and advanced courses available for serious learners.
I: Great! You talked about programming languages. Which ones are often used by traders?
Expert: C ++ is most preferable, as long as high-frequency trading (HFT) will remain relevant. The reason is that memory leaks and related errors have much less space in C ++ than in other languages. Python was designed mainly for programming strategies and testing based on historical data, because it is easier to learn and supports good scientific libraries such as Numpy. A number of forums today discuss investment and trading strategies programmed in Python.
Is algorithmic trading suitable only for institutional investors?
Me: How do individual participants in algorithmic trading feel? It seems to me that the price of entry is too high for them to allow themselves to participate in algorithmic trading.
Expert: The cost of participating in algorithmic trading is certainly higher than in the case of a traditional trading terminal. Placing servers on the exchange can be expensive. According to the latest statistics, almost 70-80% of trade on Wall Street is carried out with the help of robots, mainly by large institutional investors and hedge funds. However, opportunities for individual participants are evolving with the advent of web-based platforms. For someone who is not too concerned about the delay, they have a certain charm. In addition, companies such as Interactive Brokers provide individual clients with an application programming interface and software packages, so that traders can program their own trading strategies and methods. Having mastered them, it will be no more difficult to log in to your account on Gmail. You log into your account, test your strategy, test it on historical data, and, after optimization, trade in real markets. It is also strongly recommended to try to trade "on paper" or on the simulator.
Me: How do you assess the general attitude towards algorithmic trading in India? Are companies willing to choose algorithmic trading, given its niche category and the need to attract highly qualified practitioners?
Expert: Algorithmic trading was authorized by the Indian Council of Securities and Exchange Commission in 2008. During these 8 years, about 50% of trade volumes or even more have been carried out using algorithmic trading. This indicates its popularity. Indian stock exchanges are very well adapted to change, constantly increasing the number of active participants. Both foreign and local investments use algorithmic trading to place orders on the exchanges.
A look into the future
Me: What does the future look like on a global scale?
Expert: Very promising, in fact. It is clear that the future of automation, it moves the world. In any field, automation makes a tectonic shift away from the traditional path and the same applies to the stock market. In the US markets, 70-80% of volumes pass through automated systems. Emerging markets, such as India, are seeing exponential growth in this area. Of course, markets evolve every day, so trading costs will decrease from a certain point onwards. A good illustration is the automotive industry, where, after the introduction of robots, they initially thought that the industry could not progress because of the high cost of capital.
Me: Since you have been involved in algorithmic trading for a long time, could you list some of the biggest lessons she has taught you?
Expert: They are, in fact, quite small. The most important of these is that it is not enough to have a good trading strategy, you also need to have a competitive advantage. It can range from innovative ideas to low commissions or markets to which you have access, but you should always have some kind of killer plan if you plan to be successful. Think of it like any ordinary business where you must develop a strategy to outwit your competitors. For any person starting a new business, it is important to understand the nuances of trade.
Me: Cool! Thank you for your ideas. They really helped to dispel some doubts about algorithmic trading. Can you tell me what my next step should be if I want to understand more in this area?
Expert: The best way is to find experts and authorities in this field, talk with them and discuss your doubts. Try freely available tools and resources on the Internet. Be ready to accept new knowledge and learn new skills!
To discuss algorithmic trading with authority in this area, you can join the “Informative Session on Algorithmic Trading” with Mr. Nitesh Handelwal, co-founder of iRage Capital Advisory Pvt Ltd , a leader in algorithmic and high-frequency trading in India. With a wealth of experience in world markets and an understanding of the business environment, Nitesh spoke at events in various exchanges in South-East Asia, conveying his understanding of algorithmic trading.
Source: https://habr.com/ru/post/302326/
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