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Algorithmic Trading: Unlocking the Secrets of Black Box Trading

Published by: TowerGroup

Published: Sep. 14, 2004 - 15 Pages


Table of Contents


TowerGroup Take-Aways




Report Coverage




Vision for Algorithmic Trading




Defining Algorithmic, Arbitrage/Strategy, and Quantitative Trading


Exhibit 1: A Variety of Product Offerings Are Often Lumped and Labeled Algorithmic Trading (2004)




Algorithmic Trading Strategies Defined




Quantitative Trading Solutions Providers


Exhibit 2: Segmentation of Algorithmic and Arbitrage/Strategy Trading Providers or Enablers (2004)


How These Algorithms Are Delivered

Brokers Providing Algorithms

Brokers Providing Algorithms and Trading Platforms

Third-Party Software Providers

Quantitative Trading as a Competitive Yet Complex Advantage




Is Quantitative Trading the Silver Bullet?

Drivers for Quantitative Trading

Arguments for Quantitative Trading

Arguments Against Quantitative Trading




Trends in Quantitative Trading

Commoditized Access

The Next Boon for Order Management Systems?

Financial Information eXchange Protocol

Transaction Cost Analysis

International

Nonequity and Cross-Asset-Class Algorithms




The Size of the Algorithmic and Arbitrage/Strategy Trading Market


Exhibit 3: Percentage of US Equity Trades Flowing Through Algorithms/Trading Strategies (2004)




How Does the Future of Algorithmic Trading Look?

Quantitative Trading Becomes More Robust

Electronic Trading Continues to Cannibalize the Institutional Cash Desk


Exhibit 4: Trends in US Equity Flow via Electronic Channels (2000-06)


Algorithmic Trading Commands a New Commission Schedule


Exhibit 5: US Buy-Side Equity Algorithmic Trading and Program Trading Volume (2000-06)


Comfort with Algorithmic Trading Leads to Increased Use of Algorithms


Exhibit 6: Explosive Growth Expected in US Equity Algorithmic Trading (2000-06)

Exhibit 7: Growth in US Equity Quantitative Trading by Channel (2004-06)


The Growth in Quantitative Trading Is Limited




Summary

Abstract

Quantitative trading strategies, including algorithmic trading and arbitrage or strategy trading, have emerged as the next generation of solutions to facilitate the electronic trading markets. This status is driven more by the changing market structure and movement to electronic trading than by the revolutionary capabilities of the underlying algorithms. Fragmentation of liquidity and lower commission price points are driving the buy side to use algorithms, while institutional brokers are using algorithms to lower their own trading costs in order to support those lower commission price points. Those same institutional brokers apply algorithms to further automate the electronic trading capabilities for the buy side while offering a value-added layer that gives them the chance to wrap additional services and higher fees to algorithmic trades. This practice has spawned an arms race as brokers rush to offer algorithms and gain mindshare and market share in the quantitative trading space.

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