Friday, August 3, 2012

non-event-driven trade origination (Charles River)

(Background -- all order origination must be driven by something, sometimes by the clock!)

Apart from event driven algo trading, a lesser-known type of semi-algo trading system is what I call trading signal generation. In some trading software (Charles River?), you can configure portfolio balancing "rules" to automatically generate candidate trades -- trades needed to balance a portfolio. These candidate orders start a "workflow" and show up on the order blotter. Trader can take her time to decide when to hit the market.

These trading signals are not event driven, not CEP type. They could be driven by a periodic revaluation. I think it's also possible to start a book-revaluation on-demand, perhaps when the asset manager decides to do so.

The asset manager could be a private wealth advisor or a fund manager. Portfolio balancing is important to asset allocation ratios.

Unlikely high frequency shops, these candidate trades are not automatically sent to the exchange. Therefore, the impact and risk are less severe. Without human intervention, the risk is much higher. I guess that's why the high frequency shops usually use small orders, making many small gains and many small losses.

There's also a 3rd (middle-ground) type of algo-trading, where a human trader (not an operations person) monitors the automated trading machine, either by market order, limit order, RFQ, RFQ-auto-response, or ECN quotes (always executes off the ECN). Under each category, human intervention level (and risk) are rather different. The human trader watches the orders sent, requests received, quotes sent/received and can jump in and take over. This 3rd type is also event-driven.

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