Order Types = Algos
And now they're easy to build
While listening to the latest Futures Radio podcast, which I actually watched on YouTube, I got to thinking about how the algo space has evolved and where it is today.
Some trace the origin of automated trading back to the Designated Order Tracking (DOT) system at the New York Stock Exchange (NYSE) in the 1970s. DOT was really just an automated order routing system used to send orders to the correct post at NYSE. Smart Order Routing (SOR) in its infancy. This was the beginning of the end to the noble career of floor runner.
Jump forward to the early 90s and I’m working on the floor the Chicago Mercantile Exchange. Trading was still done manually and in the pits. Algorithmic trading had evolved as far as program trading with traders arbing baskets of stocks in the S&P 500 versus S&P 500 futures at CME. We were still in a world of SOR. Globex was being talked about, but most of us on the floor ignored it.
In the mid-90s, I was trading at a Commodity Trading Advisor (CTA). We had some automation, but nothing along the lines of automated order entry. More along the lines of backtesting and research. No order execution algos. No automated order entry. Globex was just coming online at CME, but access was limited. Other exchanges like LIFFE and Eurex were coming along with their own electronic matching engines and technology was swiftly moving into the trading space. I heard through the grapevine about some traders arbing stocks and options between Chicago and New York using something called C plus plus. I figured it was a fad and didn’t get involved. Whoops.
Shortly after exchanges launched their electronic matching engines, algos were quick to follow. It didn’t take long for order types and order management techniques that began in the pits to find their way to electronic order execution. The important thing to remember is order types. Order types, outside of plain vanilla market and limit orders, are algos. Need a OCO (order-cancels-order)? That’s an algo. Need a MOC order (market-on-close) order? That’s an algo. Go ahead and combine those into an OCO/MOC order. That’s a complex algo and orders like that were executed by pit brokers for years prior to the evolution of electronic matching engines and “algos”.
So where are we now? How have algos evolved? Well, there are some monsters out there. Very large and complex algos are certainly out there and providing terrific value to traders. There are firms like RCM-X dedicated to developing and providing these robust algos. TT is in that space as well and provides market-making algos as well as some advanced order entry tools like TT Order Types. These include TT Bracket, TT Sniper, TT With A Tick and more. Much of this order entry logic was also used on the floor. What algo magic has done is added efficiency to the order entry. Algos automate repeatable manual actions and add parameters so the user may tweak the defined algo logic to squeeze the order for the best possible price. These are order types. Many of these TT Order Types were developed in ADL. You may open these order types in ADL and view how the algo logic has been stitched together.
The image below is a snippit from an algo developed by TT and provided to subscribers in their instance of ADL. Anyone with access to ADL may view this algo, rebuild it, and tweak it to meet their specific needs.
These algos are terrific building blocks for learning how to build an algo. Simply follow along with the construction provided to learn how the blocks work together. It’s a great learning process.
It is order types and order management tools that really flourish in the algo space. Back to when ADL was first released, and still to this day, traders speak of their algos as trading aids. The majority of algo traders that I know are “hybrid” traders. They use algos along with discretionary trading. They build and use algos to ensure optimal order entry. Faster and more efficient order execution. They may use algos to enter orders and manage the order manually. Others may enter their orders manually and manage the order or position with an algo.
Hybrid traders. Discretionary algo traders. It’s a thing and has been around for a long time. This goes beyond, or more precisely, narrows down, what most traders envision when they hear algo. They think of some highly complex logic that jumps through a myriad of loops. Algos that enter an order, adjusts the order when necessary, manages the fill, and reverses position when necessary. Sure, some algos do that, but the vast majority of algo logic I’ve seen has been simple order entry logic.
If you’d like to see more examples of traders talking about and sharing thoughts on algos, check out the TT Community page dedicated to ADL. Click through some of the entries there to see algo examples, questions, and answers.
If you’d like to see a bit more about constructing algos in ADL along with video of algo construction and ADL tips, subscribe to my YouTube page where you’ll find a long, long list of algo examples.
Thanks for reading. I appreciate any and all feedback.