Quantative Trading Essay

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Algorithmic Trading Trends and Drivers January, 2005 ______________________________________________________ Presented by: Tellefsen Consulting Group, Inc. AGENDA Background Algorithmic Trading Components Trends Factors Impacting Algorithmic Trading Design Flaws of Central Limit Order Books System Design Limitations Conclusions CG Tellefsen Consulting Group, Inc. Algorithmic Trading Trends and Drivers 2 Consultants to the Financial Services Industry BACKGROUND Liquidity pool hubs and spokes: – Equity/Options and Futures Exchanges – Equity ECNs – Fixed Income Intra-Dealer Brokers – Market Makers, Specialists, Proprietary Trading Firms, Trading Arcades, Scalpers/Day Traders – Buy Side/Quant Trading Shops – Boutiques The evolution of trading technology solutions: – ECN aggregators, smart routers, algorithmic slicers, etc. CG Tellefsen Consulting Group, Inc. Algorithmic Trading Trends and Drivers 3 Consultants to the Financial Services Industry BACKGROUND (Cont’d)… Program trading, automatic order generators and automated order routing systems are used mainly by sell-side firms to conduct business as: – Principal/proprietary trading – Agency/customer facilitation – In: Equities, Fixed Income, Futures and Options Strategies include index substitutions, risk modifications, liquidation of exchange for physicals (EFPs), etc. Buy programs occur when the futures market is overvalued, relative to the cash market. Sell programs occur when the cash market is overvalued, relative to futures. CG Tellefsen Consulting Group, Inc. Algorithmic Trading Trends and Drivers 4 Consultants to the Financial Services Industry BACKGROUND (Cont’d)… Largest players today include: – Citadel Investment Group – Citigroup – Credit Suisse First Boston – Deutsche Bank – Goldman Sachs – Lehman Bros. – Morgan Stanley – Susquehanna

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