Algorithmic trading, a form of automated trading in the
equities market, is reaching the next stage of its evolution to
support sophisticated trading. And IT directors will need to
upgrade infrastructure to support the increase in business sparked
by algorithmic trading.
In a new report on trends in algorithmic trading, research and
consulting adviser Tabb Group said the need for high-speed order
processing was driving many large brokers, such as Merrill Lynch,
to upgrade their IT and communications infrastructure.
As global equity traders adopt more electronic trading tools,
their firms' technology infrastructure must be ready for huge
increases in bandwidth and storage requirements, or risk losing out
to their rivals, said Adam Sussman, report author and TABB Group
senior consultant.
Algorithmic trading involves buy or sell orders of a defined
quantity determined by a computer model (or algorithm) that
automatically generates the timing and size of orders based on
predefined market conditions.
The technique relies on researchers developing a trading
strategy, which is converted into a computer algorithm by a team of
IT programmers. This process previously took several months, but
the emergence of software tools such as those produced by Apama
enables the researchers to build the algorithms themselves using a
graphical modelling tool.
Financial institute Nomura Securities last week announced it was
deploying Velocity, a product from Vhayu, a provider of financial
market data analytics, as part of its algorithmic trading
strategy.
The software will enable Nomura to build algorithmic trading
strategies that scan the entire market to uncover trading
opportunities.
Akio Hori, executive director of global IT strategy at Nomura,
said, "We have deployed Vhayu Velocity as an integral component of
our high-frequency algorithmic trading applications." Velocity is
helping Nomura to simultaneously analyse and store financial market
data.
Algorithmic trading has been used in the London equities market
since around 2001 but only now, with developments in
straight-through processing, are markets seeing the benefits of
this automated approach.
Even so, the use of algorithmic trading is concentrated in the
top institutional brokers and not yet widespread, according to the
London Stock Exchange (LSE).
"We estimate that their use has driven a proliferation of
smaller orders and may well account for over 40% of executions,"
the Stock Exchange noted.