Home » Analytics » Algorithmic and High-frequency trading: an overview

Algorithmic and High-frequency trading: an overview

Marco Avellaneda, NYU, Algorithmic and High-frequency trading: an overview, here.

Algorithmic trading: the use of programs and computers to generate and execute (large) orders in markets with electronic access.

Almgren and Chriss, NYU, Dec 2000, Optimal Execution of Portfolio Transactions, here.

Abstract

We consider the execution of portfolio transactions with the aim of minimizing a combination of volatility risk and transaction costs aris- ing from permanent and temporary market impact. For a simple lin- ear cost model, we explicitly construct the efficient frontier in the space of time-dependent liquidation strategies, which have minimum expected cost for a given level of uncertainty. We may then select op- timal strategies either by minimizing a quadratic utility function, or by minimizing Value at Risk. The latter choice leads to the concept of Liquidity-adjusted VAR, or L-VaR, that explicitly considers the best tradeoff between volatility risk and liquidation costs.

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