As there are no study notes from BT available on this reading (at date), i made a 1-page bullet-point summary myself.
Please find it below, hope its useful for some of you.
Distinguish between algorithmic trading and high frequency trading
· Algorithmic trading = "algorithmic execution"; HFT is ultra-fast automatic trading strategies
· HFT use super-high speed computers and co-located servers
· Algorithmic trading refers to trade execution strategies that are typically used by fund managers to buy or sell large amounts of assets. They aim to minimize the cost of these transactions under certain risk and timing constraints. Such systems follow preset rules in determining how to execute each order. Their job is to get a good price (as compared to various benchmarks) and minimize the impact of trading. This is done by slicing orders and dynamically reacting to market events.
Identify factors that drove the evolution of HFT
· Big data
· Natural language programming (reading and translating information to an aggregate index and and a buy/sell decision)
· Decimalization of US capital markets resulting in price of stocks being quoted in decimals instead of fractions of a dollar. Small tick sizes caused an explosion in market data volumes of so high volumes that machines are ideally suited to process them, rather than humans
Discuss the implications of HFT on regulation in financial markets
· Regulation should be predictive, kicking in before an event, instead of after as it is now
· Regulation should adopt new measures, such as VPIN: risks are different so risk management tools should be too
Distinguish between liquidity risk and timing risk
· Both relate to implementation shortfall: the transaction costs between the time a trader decides to trade and the time he actually trades, composed of liquidity risk and timing risk
· Liquidity risk: trading immediately means liquidity costs will be high (you need to keep liquidity so you can execute deals immediately), waiting will decrease liquidity cost (you can decrease liquidity reserves because you have time to find funding if required)
· Timing risk: by waiting to trade prices could move in an unfavorable direction
· Balance needs to be found to minimize total cost (liquidity risk + timing risk)
Please find it below, hope its useful for some of you.
Distinguish between algorithmic trading and high frequency trading
· Algorithmic trading = "algorithmic execution"; HFT is ultra-fast automatic trading strategies
· HFT use super-high speed computers and co-located servers
· Algorithmic trading refers to trade execution strategies that are typically used by fund managers to buy or sell large amounts of assets. They aim to minimize the cost of these transactions under certain risk and timing constraints. Such systems follow preset rules in determining how to execute each order. Their job is to get a good price (as compared to various benchmarks) and minimize the impact of trading. This is done by slicing orders and dynamically reacting to market events.
Identify factors that drove the evolution of HFT
· Big data
· Natural language programming (reading and translating information to an aggregate index and and a buy/sell decision)
· Decimalization of US capital markets resulting in price of stocks being quoted in decimals instead of fractions of a dollar. Small tick sizes caused an explosion in market data volumes of so high volumes that machines are ideally suited to process them, rather than humans
Discuss the implications of HFT on regulation in financial markets
· Regulation should be predictive, kicking in before an event, instead of after as it is now
· Regulation should adopt new measures, such as VPIN: risks are different so risk management tools should be too
Distinguish between liquidity risk and timing risk
· Both relate to implementation shortfall: the transaction costs between the time a trader decides to trade and the time he actually trades, composed of liquidity risk and timing risk
· Liquidity risk: trading immediately means liquidity costs will be high (you need to keep liquidity so you can execute deals immediately), waiting will decrease liquidity cost (you can decrease liquidity reserves because you have time to find funding if required)
· Timing risk: by waiting to trade prices could move in an unfavorable direction
· Balance needs to be found to minimize total cost (liquidity risk + timing risk)
