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10 phrases you need to know if you want a job in electronic trading

Do you know what Smart Order Routing is?

Do you know what Smart Order Routing is?

Trading jobs are not as exciting as they were. Human beings are being displaced by algorithms. And algorithms are becoming more effective while human intelligence is diverted by videos of cats chasing pom poms. If you want to work in trading, therefore, you might want to familiarize yourself with electronic trading vernacular.

We’ve chosen 20 phrases and their definitions from a new book – Dark Pools and Electronic Trading for Dummies, written by Jay Vaananen, the ex-private banker behind the Banker’s Umbrella blog and Twitter account. If you want a job in electronic trading we suggest you take note. It will help if you know your phantom liquidity from your streaming liquidity pools before you step into an interview.

1. Algorithm

You can’t be interested in electronic trading without being aware what an algorithm is. “An algorithm is at the very heart of automated trading,” says Vannanen. “There can be no automated trading without algorithms,” he stresses. “In its simplest form, an algorithm is a [mathematical] formula that solves a particular question. It’s a set of strict, step by step mathematical rules that end up giving you an answer to a mathematical problem.”

In the case of trading algorithms, this problem is when – and how much – to trade.

2. Co-location

Co-location is a phrase from the world of high frequency trading. It refers to the position of high frequency trading firms’ servers. These servers need to be, “as close as possible to the trade matching engine of a stock exchange so that trade data has as short as possible a time to travel,” says Vaananen.

3. Dark pools

Also known as, ‘off-exchange venues’, dark pools are places where institutions can trade without showing the whole market what they’re up to. “When big institutions needed a place to trade and didn’t want to show the market all that they were planning to do, dark pools started to be set up,” says Vaananen. “What differentiates stock markets from dark pools is that stock markets are transparent, which means that the trading information and the amount of stocks that are bid and offered are available for everyone to see.”

In the case of dark pools, this transparency is gone. They’re opaque. Hence the name.

4. High frequency trading (HFT)

“High frequency trading is the use of algorithms to trade shares at a high velocity of turnover, sending orders to the market in large numbers and using computer algorithms at great speed,” says Vaananen. “Thousands of trades are sent out and executed inside milliseconds, and it all happens at a pace faster than the eye can detect.”

Vaananen points out that high frequency traders don’t carry trades overnight, meaning they don’t hold shares at the end of the trading day – which is one reason why you get heavy trading before the markets close. High frequency trading requires a vast upfront investment in state-of-the-art technology. This makes the barriers to entry very high.

5. Latency

Latency is another concept that’s key to high frequency trading. Vaananen defines it as referring to, “the whole process of finding out about an event, to analysing the event, to making a decision as to what to do about the event and then to executing that decision.”

6. Pinging 

Pinging is another part of the high frequency trading idiom. “Pinging is when an algorithm sends out a large amount of small orders (100 share lots) inside the bid-offer spread,” says Vaananen. “If any of these orders is matched, the algorithm can determine whether there is a larger, hidden order in the market. Knowing that there is a large, hidden order gives the opportunity for a HFT program to trade on that information at what could be a near risk-free profit.”

7. Phantom Liquidity 

This is a concept that relates to high frequency trading. “If you look at an order book on a stock exchange, you’ll see plenty of bids and offers and lots of volume on both sides of the trading book, but is the volume really there?,” writes Vaananen. “if those bids and offers are posted by high frequency trading programmes, they can be withdrawn in milliseconds, which means that liquidity which appears to be there can disappear faster than the eye can blink.”

8. Smart Ordering

Smart ordering is used by high frequency trading firms to find the best possible price. “Smart order routers are programs that send orders to different market venues,” says Vaananen. ” Including both dark pool and displayed exchanges – spending on the criteria of the HFT strategy.”  They then choose the venue with the best possible price to place the order.

9. Streaming Liquidity 

Streaming liquidity is a phrase which relates to dark pools. In the past, dark pools were ‘block oriented’ – they traded large blocks of shares and and required that anyone who traded in them had to trade a minimum size of block. Not any more. “As dark pool providers have been looking to grow, streaming liquidity pools have become more popular,” says Vaananen. “Streaming liquidity pools don’t have a minimum share requirement, so they have opened the doors to high frequency trades in the hope that high frequency traders bring liquidity to the pools.” (High frequency trades like to trade in small share lots of just 100 or 200 at a time.)

10. Volume-Weighted Average Price (VWAP)  

A VWAP is an algorithm that calculates the price of a stock based upon the average volumes traded. It attempts to execute trades at a price close to or better than the market VWAP. VWAP based strategies are popular among “institutions and particularly investment funds looking to buy or sell large positions,” says Vaananen. “By using an automated VWAP strategy they can track the market without taking sizeable losses.”

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  1. VWAP is volume weighted average price.

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