An Introduction to Algorithmic Trading (PDF) @ PDF Room (2024)

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Come

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to ComeAN INTRODUCTION TOALGORITHMIC TRADINGBasic to Advanced StrategiesEdward A LeshikJane CralleA John Wiley and Sons, Ltd., Publication

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to ComeThis edition first published 2011.Copyright ⃝C 2011 John Wiley & Sons LtdRegistered officeJohn Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ,United KingdomFor details of our global editorial offices, for customer services and for information about how to applyfor permission to reuse the copyright material in this book please see our website at www.wiley.com.The right of the author to be identified as the author of this work has been asserted in accordance withthe Copyright, Designs and Patents Act 1988.All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise,except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission ofthe publisher.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books.Designations used by companies to distinguish their products are often claimed as trademarks. All brandnames and product names used in this book are trade names, service marks, trademarks or registeredtrademarks of their respective owners. The publisher is not associated with any product or vendormentioned in this book. This publication is designed to provide accurate and authoritative information inregard to the subject matter covered. It is sold on the understanding that the publisher is not engaged inrendering professional services. If professional advice or other expert assistance is required, the servicesof a competent professional should be sought.For other titles in the Wiley Trading SeriesPlease see www.wiley.com/financeA catalogue record for this book is available from the British LibraryISBN 978-0-470-68954-7 (hardback); ISBN 978-0-470-97935-8 (ebk);ISBN 978-1-119-97509-0 (ebk); ISBN 978-1-119-97510-6 (ebk)Typeset in 10/12pt Times by Aptara Inc., New Delhi, IndiaPrinted in Great Britain by TJ International Ltd, Padstow, Cornwall

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to ComeContentsAcknowledgments viiMission Statement viiiPART I INTRODUCTION TO TRADING ALGORITHMSPreface to Part I 31 History 72 All About Trading Algorithms You Ever Wantedto Know . . . 93 Algos Defined and Explained 114 Who Uses and Provides Algos 135 Why Have They Become Mainstream so Quickly? 176 Currently Popular Algos 197 A Perspective View From a Tier 1 Company 258 How to Use Algos for Individual Traders 299 How to Optimize Individual Trader Algos 3310 The Future – Where Do We Go from Here? 37

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Comeiv ContentsPART II THE LESHIK-CRALLE TRADING METHODSPreface to Part II 4111 Our Nomenclature 4912 Math Toolkit 5313 Statistics Toolbox 6114 Data – Symbol, Date, Timestamp, Volume, Price 6715 Excel Mini Seminar 6916 Excel Charts: How to Read Them and How to Build Them 7517 Our Metrics – Algometrics 8118 Stock Personality Clusters 8519 Selecting a Cohort of Trading Stocks 8920 Stock Profiling 9121 Stylistic Properties of Equity Markets 9322 Volatility 9723 Returns – Theory 10124 Benchmarks and Performance Measures 10325 Our Trading Algorithms Described – The ALPHA ALGOStrategies 1071. ALPHA-1 (DIFF) 1071a. The ALPHA-1 Algo Expressed in Excel FunctionLanguage 1092. ALPHA-2 (EMA PLUS) V1 And V2 1103. ALPHA-3 (The Leshik-Cralle Oscillator) 1124. ALPHA-4 (High Frequency Real-Time Matrix) 1125. ALPHA-5 (Firedawn) 113

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to ComeContents v6. ALPHA-6 (General Pawn) 1137. The LC Adaptive Capital Protection Stop 11426 Parameters and How to Set Them 11527 Technical Analysis (TA) 11728 Heuristics, AI, Artificial Neural Networks andOther Avenues to be Explored 12529 How We Design a Trading Alpha Algo 12730 From the Efficient Market Hypothesis to ProspectTheory 13331 The Road to Chaos (or Nonlinear Science) 13932 Complexity Economics 14333 Brokerages 14734 Order Management Platforms and Order ExecutionSystems 14935 Data Feed Vendors, Real-Time, Historical 15136 Connectivity 15337 Hardware Specification Examples 15538 Brief Philosophical Digression 15739 Information Sources 159APPENDICESAppendix A ‘The List’ of Algo Users and Providers 165Appendix B Our Industry Classification SECTOR Definitions 179

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to Comevi ContentsAppendix C The Stock Watchlist 183Appendix D Stock Details Snapshot 185CD Files List 243Bibliography 245Index 249

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to ComeAcknowledgmentsEdwardThanks go to Gerry Prosser, Rob Bruce, Ian Kaplan, Dr. Mivart Thomas, SebastianThomas, Jason Sharland, Dan Fultz and the late Gillian Ferguson. To dearest Dianago thanks for fifty years of enthusiasm, encouragement, wisdom and insight – trulya ‘woman for all seasons’.EDWARD LESHIKLondon, EnglandMy acknowledgements from the western world:JaneCould not have done it without you folks –Lisa Cralle Foster, J. Richard (Rick) Kremer, FAIA, Alan H. Donhoff, Lisa LuckettCooper, Rose Davis Smith, Helen D. Joseph, Shelly Gerber Tomaszewski, BradKremer, Jenny Scott Kremer and the late John Ed Pearce. Then there is Mr. Linker,President of Linker Capital Management Inc., an honor to his father, the late SamuelHarry Linker.JANE CRALLEKentucky, USABoth Edward and JaneOur sincere thanks go to Aimee Dibbens for her encouragement and enthusiasm ingetting this book written. Special thanks to the great team at Wiley, Peter Baker, Vivi-enne Wickham, Caroline Valia-Kollery, Felicity Watts and the anonymous reviewerswho helped shape this book.Our special thanks go to Nick Atar whose enthusiastic encouragement and hospitalityat the Waffle helped make this book a reality.

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P1: FCG/SPH P2: FCG/SPH QC: FCG/SPH T1: SPHfm JWBK496/Leshik February 2, 2011 19:16 Printer Name: Yet to ComeMission StatementThe goal of this book is to:1. Demystify algorithmic trading, provide some background on the state of the art,and explain who the major players are.2. Provide brief descriptions of current algorithmic strategies and their userproperties.3. Provide some templates and tools for the individual trader to be able to learn anumber of our proprietary strategies to take up-to-date control over his trading,thus level the playing field and at the same time provide a flavor of algorithmictrading.4. Outline the math and statistics we have used in the book while keeping the mathcontent to a minimum.5. Provide the requisite Excel information and explanations of formulas and func-tions to be able to handle the algorithms on the CD.6. Provide the reader with an outline ‘grid’ of the algorithmic trading business sothat further knowledge and experience can be ‘slotted’ into this grid.7. Use a ‘first principles’ approach to the strategies for algorithmic trading to providethe necessary bedrock on which to build from basic to advanced strategies.8. Describe the proprietary ALPHA ALGOS in Part II of the book to provide asolid foundation for later running of fully automated systems.9. Make the book as self-contained as possible to improve convenience of use andreduce the time to get up and running.10. Touch upon relevant disciplines which may be helpful in understanding theunderlying principles involved in the strategy of designing and using tradingalgorithms.11. Provide a detailed view of some of our Watchlist of stocks, with descriptions ofeach company’s operations. Provide a framework for analyzing each company’strading characteristics using our proprietary metrics. It is our belief that anintimate knowledge of each stock that is traded provides a competitive advantageto the individual trader enabling a better choice and implementation of algostrategies.