what is algorithmic trading and why is it catching on?
How are buy-side and sell-side institutions using it? And what impact is it going to have on trading desks? Algorithmic trading “is a way to codify a trader’s execution strategy,” says Jana Hale, global head of algorithmictrading at Goldman Sachs in New York. “It takes how traders think and strategize about their flows and then implements that in an electronic and systematic way.” Traders use the models to obtain the returns of certain benchmarks – the most common of which is volume weighted average price (VWAP). But brokers offer strategies beyond the simple VWAP. “They’ve gotten far more complex and far more advanced than a simple volume weighted price model,” says John Wheeler, vice president and director of U.S. equity trading at American Century in Kansas City. Strategies offered by brokers include: time weighted average price (TWAP), the previous night’s close and implementation shortfall – a model that weighs the urgency of executing a trade against the risk of moving the stock.
