Execution Algorithms
VWAP (volume-weighted average price) algorithms execute positions at or better than volume-weighted benchmark prices. TWAP (time-weighted average price) algorithms spread execution across time to minimize impact. Implementation shortfall measures actual execution cost vs. pre-trade benchmarks.
Smart order routers determine optimal venues and execution paths. Different exchanges have different liquidity. Routing algorithms balance speed, cost, and certainty of execution. Sophisticated routers adapt to market conditions in real-time.
Risk Management Systems
Pre-trade controls validate orders before submission. Position limits, notional limits, Greeks limits all prevent oversized positions. Order size validation checks against available liquidity. Circuit breakers halt trading if losses exceed thresholds.
Real-time monitoring tracks positions, P&L, margin usage, and risk metrics continuously. Alerts trigger when exposures approach limits. Manual intervention is always available; automation never operates without oversight.
Technology Infrastructure
Low-latency systems minimize delay between signal generation and execution. Hardware selection, colocation at exchanges, optimized networking all reduce latency. Ultra-low latency trading (microseconds) requires specialized infrastructure.
Redundancy prevents single points of failure. Backup systems, failover mechanisms, and circuit breakers protect against technology failures. Testing and monitoring of all systems is continuous; no system operates without scrutiny.
Compliance and Governance
Regulatory requirements mandate pre-approval of trading algorithms. Testing in simulated environments before live deployment is essential. Record-keeping of all trades, algorithm behavior, and risk metrics is mandatory.
Governance structures determine who can run algorithms, with what parameters, under what conditions. Human override must always be possible. Kill switches shut down algorithms immediately if problems emerge.
The Human Element
Algorithms supplement humans, not replace them. Monitoring systems, exception handling, and oversight require skilled traders and risk managers. The best algorithmic trading combines automation with human judgment and adaptability.
Educational content only. Not investment advice.