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# Algorithmic Trading ## What is Algorithmic Trading? - Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. - Theoretically, algo-trading makes markets more...

# Algorithmic Trading ## What is Algorithmic Trading? - Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. - Theoretically, algo-trading makes markets more efficient and liquid by rectifying temporary price discrepancies. - Approximately 70% to 80% of U.S. equity trading is estimated to be algo-driven. ## Algorithmic Trading Strategies ### Trend Following Strategies - Moving averages - Breakout - Linear regression ### Arbitrage Strategies - Triangular arbitrage - Statistical arbitrage - Index arbitrage ### Mean Reversion - Pairs trading - Basket trading ### Execution Algorithms - Volume-Weighted Average Price (VWAP) - Time-Weighted Average Price (TWAP) - Implementation shortfall ## High-Frequency Trading (HFT) - A subset of algorithmic trading. - Characterized by high speeds, high turnover rates, and high order-to-trade ratios. - Use sophisticated algorithms to analyze market data and execute orders in fractions of a second. - HFT firms often employ co-location, placing their servers in close proximity to exchanges to minimize latency. ## Advantages and Disadvantages | Advantages | Disadvantages | | :--------------------------------------------- | :---------------------------------------------------- | | Trades executed at the best possible prices | System failure | | Reduced transaction costs | Model decay | | Reduced possibility of human error | Data snooping bias | | Backtesting strategy before live trading | Overfitting | | Eliminate emotional and psychological factors | Requires advanced programming and quantitative skills |