Fund managers do their maths

MSNBC – More than 28 per cent of all US equity trading was driven by so called “algorithmic trading” at the end of last year, as traditional fund managers followed the lead of hedge funds and began to embrace complex automated trading strategies.

The figure is set to rise much further in the coming months and years as fund managers (along with brokers and exchanges) strive for ever-greater efficiency and control over the trading cycle amid heightened market competition and consolidation.

Algorithmic trading uses mathematical models, which are being developed by quantitative PhD-armed staff at a growing number of investment banks and at specialist trading firms, as a means of trading large blocks of shares quickly.

Algorithmic traders decide when to place buy or sell trade orders on the basis of quantitative models that automatically generate the timing and size of orders. These are based on goals specified by the parameters and constraints of a mathematical algorithm – a step- by-step mathematical problem-solving procedure.

Greater use of algorithmic trading does not come cheap. Last year, approximately $230m was spent across the US equity markets on the various technological components that make up algorithmic trading, according to NeoNet, the agency broker. By 2008, NeoNet forecasts the figure will reach more than $300m.

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