Trading Algorithms Grow Increasingly Sophisticated

OK, I find this a but unnverving.

The next generation of trading algorithms will be far more flexible, react to unexpected events and handle highly complex relationships, according to a new report released by the Tabb Group, a Westborough, Mass., research firm.
Algorithms, or trading software that seeks to execute trades more efficiently, are now well-entrenched in Wall Street. Adam Sussman, senior consultant at Tabb Group and author of the latest Tabb report, points out how Wall Street firms are developing new products to eliminate the shortcomings of earlier generations of algorithms.
For one thing, Mr. Sussman said that some of the larger brokers are developing multi-asset class algorithms that can trade varied assets such as bonds, stocks and currencies. For instance, someone looking to trade a European stock and wanting to simultaneously hedge their currency risk would find such an algorithm useful. The use of these kinds of algorithms is more prevalent among hedge funds, according to Mr. Sussman. These algorithms help ensure that “you are never exposed to more currency risk or credit risk than you want to be,” he said.
The Tabb study also found that portfolio algorithms are becoming increasingly complex in how they execute orders and are becoming better at formulating an effective execution strategy to trade a portfolio. For instance, some of these algorithms are able to gauge how selling one stock will impact another. The Tabb Group estimates that over the next two years, algorithmic portfolio trading will become as common as single stock algorithms today.

What could possbily go wrong?

I know I’ve made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I’ve still got the greatest enthusiasm and confidence in the mission. And I want to help you.
– HAL 9000 in 2001: A Space Odyssey

Posted by on March 1st, 2006 at 12:48 pm


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