10 Introduction To Electronic Trading

Introduction to Electronic Trading
Paul Alexander Bilokon, PhD
Thalesians Ltd
Level39, One Canada Square, Canary Wharf, London E14 5AB
2021.03.26
Terminology
Kinds of electronic trading (i)
I Electronification: Introduction of computerized system into a process, such as

trading.
I Electronic trading: Electronified trading; a method of trading relying on computer
technology. Trading can be electronified to varying degrees, as evidenced by the
following.
I Algorithmic trading: (From early 90s.) The use of computer algorithms to make
certain trading decisions and/or submit orders and/or manage those orders after
submission. Algorithms may be used to calculate one or multiple of the price, timing,
quantity, and other characteristics of orders. Not all algorithmic trading is automated as
the actual placement of orders can still be done manually using the information
produced by the algorithmic software.
Terminology
Kinds of electronic trading (ii)
I Trading strategies (models)—may refer to algorithms for pricing, quoting, order

management, market making, electronic liquidity provision, statistical arbitrage,
liquidity detection, latency arbitrage, etc.
I Automated trading—(From Late 90s.) A method of trading where computer software
is used to fully automate order generation. Computers are linked to market data, which
is fed into algorithms, and then automatically place orders in the market. Although the
systems trade by themselves, they are controlled by both a risk manager and
commands within the software.
I High-frequency trading (HFT)—(From 2000s.) “Employs extremely fast automated
programs for generating, routing, cancelling, and executing orders in electronic
markets.” [CK10] HFT occurs at a rate of action only computers can maintain. It is
characterized by the sophisticated technology required to minimize latency, such as
powerful computers with direct network connections to exchanges (including
co-location).
Terminology
Failures
From Nathaniel Popper, Knight Capital Says Trading Glitch Cost It $440 Million1 , The New
York Times, 2012.08.02.
$10 million a minute.
That’s about how much the trading problem that set off turmoil on the stock market on
Wednesday morning is already costing the trading firm.
The Knight Capital Group announced on Thursday that it lost $440 million when it sold all the
stocks it accidentally bought Wednesday morning because a computer glitch.
The losses are threatening the stability of the firm, which is based in Jersey City. In its
statement, Knight Capital said its capital base, the money it uses to conduct its business, had
been “severely impacted” by the event and that it was “actively pursuing its strategic and
financing alternatives.”
The losses are greater than the company’s revenue in the second quarter of this year, when it
brought in $289 million.
[...]
Correction: August 2, 2012
An earlier home page headline about the Knight Capital Group developments referred
incorrectly to the company as a hedge fund. It is, as the article correctly notes, a trading firm.
1 https:
//dealbook.nytimes.com/2012/08/02/knight-capital-says-trading-mishap-cost-it-440-million/
Terminology
Successes
From Arnab Shome, XTX Markets Posts Healthy Revenue and Profit Uptick for 20192 , Finance
Magnates, 2020.08.06.
XTX Markets, a leading non-bank liquidity provider in the forex industry, published its annual
financials ending on December 31, 2019, showing a year-on-year revenue jump of 11.3
percent with a total of $339.8 million for the year.
“The current primary key performance indicator of the Company is net revenues,” the
Companies House filings noted.
This jump was propelled by the internal trading model improvement and favorable market
conditions, according to XTX Markets.
[...]
“In 2019, the Company became the largest Spot FX liquidity provider globally (Euromoney
2019) and also the largest European equities (systematic internalizer) liquidity provider
(Rosenblatt 2019) as it built out its growth client franchise,” the company highlighted.
2 https://www.financemagnates.com/institutional-forex/brokerage/
xtx-markets-posts-healthy-revenue-and-profit-uptick-for-2019/
Bibliography
Jaksa Cvitanic and Andrei A. Kirilenko.

High frequency traders and asset prices.
SSRN Electronic Journal, 2010.

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Introduction to Electronic Trading

Introduction to Electronic Trading

Paul Alexander Bilokon, PhD

Kinds of electronic trading (i)

I Electronification: Introduction of computerized system into a process, such as

Kinds of electronic trading (ii)

I Trading strategies (models)—may refer to algorithms for pricing, quoting, order

Jaksa Cvitanic and Andrei A. Kirilenko.

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