Beating Wall Street’s Algorithms

Beating Wall Street’s Algorithms

Oct 7, 2005

An interesting article in Waters, UK financial publication, appeared recently about some of the consequences of Algorithmic Trading On Wall Street Algorithmic Trading is the hot topic and buzz word of the day.

For those that are not familiar with the term, institutional based Algorithmic Trading is different from the Black Boxes proprietary traders use to automate a good strategy. Among these well capitalized firms Algorithmic Trading hands an order to buy or sell a stock to a computer hoping that it will do a better job than you. One of the more common algorithms involves VWAP or Volume Weighted Average Price (

As automated logic for trading becomes better and better at handling orders for traders, Waters points out, the human touch becomes less and less required, and cites several of the rounds of layoffs that occured recently among Wall Street firms. It’s a chess match between man and machine. Can a system with a human touch be devised that considers a market full of automated, efficient systems and comes out with an advantage? We at Trade-Ideas believe that the answer is yes.

We compared the following strategy to Algorithms made by Goldman, Merrill and a few others and the results were very favorable for the “hands on” approach. Many of our institutional customers and trading desk clients use a derivative of the following strategy using Trade-Ideas:

Imagine you are a trader working buy orders for a basket of 20 stocks. How would your bonus look if your average price to buy the order was significantly below the VWAP? There are several ways in which Trade-Ideas can make that happen. First you can set our servers to alert you to anytime the stocks you are working are below the VWAP(, second you can be alerted anytime a stock makes a counter directional move that’s well suited for you to bid (