Automated High Frequency Retail Trading: The Combination of Electronic Markets, Complex Algorithms and Computers Has Led to a Revolution in Trade Automation. Lower Brokerage Fees and Affordable Data and Software Packages Have Extended That Revolution to Retail Traders

Gutmann, Michael, Futures (Cedar Falls, IA)

The growth in the electronic trading of stocks, futures and options and the accompanying increase in volume, lower commissions and speed of order execution have created market data networks that support high frequency trading by the retail customer, provided the trader has adequate computing and network bandwidth. In this regard, the latest generation of PCs and high-speed Internet broadband access complete the necessary technical infrastructure for high frequency retail trading. the individual trader is able to keep pale with the sophisticated institutional trading desks while maintaining the flexibility inherent in independent, small-scale trading decisions.

Desktop trading platforms now offer the individual trader an abundance of tools and historical data for developing, back testing and executing automated strategies. Without the need to trade at volumes of large commercial funds, the individual has the opportunity to profit from the confluence of new trading technology and electronic markets at high trade frequencies.

High frequency automated trading comes with a set of hurdles that must be overcome. Managing data feeds at tick granularities and finding practical means of backtesting high frequency strategies are two of the most challenging obstacles.

TRADE AUTOMATION

Trade strategy algorithm development, backtest and execution are now widespread. Discretionary trading is increasingly being replaced with trade strategies that can be backtested to determine efficiency and executed automatically or semi-automatically with a goal of reducing human emotion from the trade equation. Swing-trade algorithms can be programmed, backtested and tuned by the individual trader and then executed against the market with little real-time oversight.

"Double your pleasure" (right) shows an implementation of a well-known pairs strategy trading the Nasdaq 100 vs. the DIA exchange-traded fund. Backtesting with appropriately tuned inputs shows a 30% annualized rate of return trading one lots with an initial $5,000 margin. Swing-trade systems can be programmed, tested and executed relatively easily using the latest desktop technologies. Trades may be manually placed from program generated signals or, for the more sophisticated, entirely automated in trade strategy code.

Backtesting swing-trade automation has become relatively straightforward. …

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Publication information: Article title: Automated High Frequency Retail Trading: The Combination of Electronic Markets, Complex Algorithms and Computers Has Led to a Revolution in Trade Automation. Lower Brokerage Fees and Affordable Data and Software Packages Have Extended That Revolution to Retail Traders. Contributors: Gutmann, Michael - Author. Magazine title: Futures (Cedar Falls, IA). Volume: 37. Issue: 11 Publication date: October 2008. Page number: 56+. © 2009 Summit Business Media. COPYRIGHT 2008 Gale Group.

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