Algorithms used by Funds Explained

Discussion in 'Trading' started by jaytrader100, Apr 15, 2008.

  1. Large funds, insurance companies, mutual funds, and pension funds must use algorithms in order to get good prices on huge amounts of stock. The algo's hide as best as they can their intention sin the market whether they are buying or selling. The algo's also try and find liquidity in numerous dark pools and open markets as fast as they can.. much faster than you or I could ever watch and type out buy sell orders etc. A large majority of these algos are produced by the ecn's and dark pools and institutions and NOT THE FUNDS. Here are a few explained:

    1. IMPLEMENTATION SHORTFALL ALGO
    http://en.wikipedia.org/wiki/Implementation_shortfall
    http://www.itginc.com/news_events/papers/implementation_shortfall.pdf

    2. VWAP ALGO volume weighted price
    http://en.wikipedia.org/wiki/VWAP
    http://www.cis.upenn.edu/~mkearns/papers/vwap.pdf

    3. ARRIVAL PRICE ALGO (very popular)
    http://corp.bankofamerica.com/publicpdf/equities/Adaptive_Arrival_Price.pdf

    4. SPECIALIST AVOIDANCE ALGO
    http://goliath.ecnext.com/coms2/gi_0199-4279692/The-impact-of-limit-order.html

    5. MARKET PARTICIPATION ALGO
    http://www.automatedtrader.net/algo-trading-news-651.xhtm
    http://www.thetradenews.com/electronic-trading/algorithmic-trading/926
    http://web.unx.com/index.php?option=com_content&task=view&id=85&Itemid=174
    http://www.paladynesys.com/NewsArticles/HW-05172007.htm

    6. OPTIMIZATION/MARKET ON CLOSE ALGO
    https://portfolio.jefco.com/Documents/2005_QES_TOC.pdf
    http://www.itginc.com/offerings/itg_algorithms.php

    7. AN ALGORITHM EXPLAINED
    http://www.asx.com.au/investor/education/basics/open_Close.htm

    Hopefully this gives a litel clarification on some of the popular algo's being used by trading desk.. there are numerous others utilised by hedge funds etc to try and profit from spreads, arbs, etc
     
  2. Great thread!

    Thank you :cool:
     
  3. thank you and you are very welcome.. happy trading everyone!
     
  4. thank you and you are very welcome.. happy trading everyone!
     
  5. And they still have a hard time beating the market even with all those algos.

    Simply buying MOS or POT or GLD, OIL, OIH, or DBA in jan 2007 would have outperformed virtually all funds for no work.
     
  6. i consider a risk of capital to be work.. anyway .. it is easy to see moves on a chart or talk about stocks that have moved huge ...AFTER THE FACT.. so you are rigth monday morning quarterbacking really is no work... i can get the lottery numbers correctly for no guess work involved right after they are drawn.. amazing aren't I!
     
  7. great call. do you have more of topic hindsight trades for us?