Algorithmic Trading Terms Glossary: Algorithmic Trading Terms in 2024
A
Algorithmic Execution
Algorithmic Execution refers to the automated process of executing large orders in small pieces over time to minimize market impact.
Algorithmic Trading
Algorithmic Trading is the use of computer algorithms to automatically execute trading strategies.
Alpha
Alpha is a measure of an investment's performance compared to a benchmark index.
Alpha Decay
Alpha Decay refers to the diminishing or reduction of an investment's excess return over time.
Alpha Generation
Alpha Generation is the process of generating excess returns by identifying and exploiting inefficiencies or mispricings in the market.
Arbitrage
Arbitrage is the practice of taking advantage of price differences between two or more markets to make a profit.
Automated Trading
Automated Trading is the execution of trades using computer algorithms without direct human intervention.
B
Backtesting
Backtesting is a process that tests a trading strategy against historical market data to evaluate its performance.
Backwardation
Backwardation is a market condition where the price of a futures contract is lower than the expected spot price, indicating a positive market expectation.
Basis Trading
Basis Trading is a strategy that involves taking positions in two related securities to exploit price discrepancies.
Best Execution
Best Execution is the legal obligation of brokers to provide clients with the most favorable terms when executing trades on their behalf.
Beta
Beta is a measure of an asset's volatility compared to the overall market.
Bid-Ask Spread
Bid-Ask Spread is the difference between the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept for a security.
Black Box Trading
Black Box Trading is a type of algorithmic trading where the trading strategies or rules are kept secret.
Block Trading
Block Trading is the buying or selling of a large quantity of securities simultaneously, often through a single transaction.
Broker-Dealer
A Broker-Dealer is a firm that engages in the business of buying and selling securities on behalf of its clients and for its own account.
C
Capital Allocation
Capital Allocation is the process of distributing financial resources across different investments or business activities.
Central Limit Order Book (Clob)
Central Limit Order Book (CLOB) is a system that matches buy and sell orders for a financial instrument, resulting in a transparent market.
Circuit Breaker
A Circuit Breaker is a mechanism designed to temporarily halt trading on an exchange during a significant market decline.
Closing Price
Closing Price is the final price at which a security is traded on a given trading day.
Co-Location
Co-location refers to the practice of locating trading servers in close proximity to exchanges to minimize network latency and gain a speed advantage.
Contango
Contango is a market condition where the price of a futures contract is higher than the expected spot price, indicating a negative market expectation.
Cross-Validation
Cross-Validation is a technique for evaluating the performance of a machine learning model on multiple subsets of the data.
Crossing Network
Crossing Network is a trading system that matches buy and sell orders internally within a given market, bypassing traditional exchange order books.
D
Dark Pool
A Dark Pool is a private trading venue or exchange where trading activity is not visible to the broader market.
Day Trading
Day Trading is the practice of buying and selling financial instruments within the same trading day, with all positions closed before the market closes.
Deep Learning
Deep Learning is a subfield of machine learning that focuses on neural networks with multiple layers.
E
Ensemble Learning
Ensemble Learning is a machine learning technique that combines multiple models to improve the overall prediction or decision-making.
Equity Market
Equity Market is a market where shares of publicly traded companies are bought and sold.
Event-Driven Strategy
Event-Driven Strategy is a trading strategy that seeks to profit from market opportunities arising from specific events, such as mergers, acquisitions, or earnings announcements.
Execution
Execution refers to the process of placing and fulfilling a trade order.
Execution Management System
An Execution Management System (EMS) is a software platform used by traders to streamline and automate the execution of trades across multiple venues or brokers.
Execution Quality
Execution Quality refers to the speed, accuracy, and cost of executing trades.
F
Feature Engineering
Feature Engineering is the process of creating new features or transforming existing ones to improve the performance of machine learning models.
Fill Rate
Fill Rate is the percentage of an order that is filled at the requested price.
Filter Rule
Filter Rule is a rule or condition used to filter or select securities for inclusion or exclusion in a trading strategy.
Front Running
Front Running is the practice of trading on advance knowledge of pending orders by a broker or trader.
Fundamental Analysis
Fundamental Analysis involves analyzing financial statements and economic factors to evaluate the value of a security.
Futures Contract
Futures Contract is a standardized agreement to buy or sell a specified asset at a predetermined price on a future date.
G
Grid Search
Grid Search is a method for finding the best combination of hyperparameters for a machine learning model by exhaustively searching through a specified grid of values.
H
Hedging
Hedging is the practice of taking offsetting positions to reduce the risk of adverse price movements in an investment portfolio.
High-Frequency Trading
High-Frequency Trading (HFT) is a type of algorithmic trading that utilizes powerful computers and high-speed data to execute trades with extremely low latency.
High-Frequency Trading (Hft)
High-Frequency Trading is a type of algorithmic trading that uses fast computers and low-latency connections to execute trades at high speeds.
Hyperparameter
Hyperparameters are parameters that are not learned by the model during training and need to be set by the user before training the model.
I
In-Sample Testing
In-sample Testing is the evaluation of a model's performance on the same data that was used for training.
Index Fund
Index Fund is a type of mutual fund or ETF that aims to replicate the performance of a specific index.
Information Ratio
Information Ratio is a measure of the risk-adjusted return of an investment strategy compared to a benchmark, taking into account the volatility of returns.
L
Limit Order
A Limit Order is an order to buy or sell a security at a specified price or better.
Liquidity
Liquidity is the ease with which an asset can be bought or sold without causing significant change in its price.
Liquidity Provider
Liquidity Provider is a market participant that quotes buy and sell prices for a financial instrument, aiming to facilitate trading and provide liquidity in the market.
Long Short Equity
Long Short Equity is an investment strategy that involves taking long positions in stocks expected to rise in value and short positions in stocks expected to decline in value.
Long Short-Term Memory (Lstm)
Long Short-Term Memory is a type of recurrent neural network architecture that can better capture long-term dependencies in sequential data.
M
Machine Learning
Machine Learning is a subset of artificial intelligence that uses algorithms to enable computers to learn and make predictions or decisions without being explicitly programmed.
Market Data
Market Data refers to data and information about trading instruments, such as prices, volumes, and order book data.
Market Efficiency
Market Efficiency refers to the degree to which prices of securities reflect all available information.
Market Impact
Market Impact refers to the effect that a large trade order has on the price of a security or market.
Market Maker
A Market Maker is a participant in the market who is willing to buy and sell a security at quoted prices, providing liquidity to the market.
Market Microstructure
Market Microstructure is the study of how markets operate and how trading decisions are made at a micro level.
Market Order
A Market Order is an order to buy or sell a security at the best available price in the market.
Mean Absolute Deviation (Mad)
Mean Absolute Deviation is a measure of the average deviation of data points from their mean.
Mean Absolute Percentage Error (Mape)
Mean Absolute Percentage Error is a measure of forecast accuracy, calculated as the average difference between observed and forecasted values as a percentage of the observed values.
Mean Return
The Mean Return is the average return of a security or investment over a specified period of time.
Mean Reversion
Mean Reversion is the theory that prices and returns eventually move back towards their mean or average.
Mean Reversion Strategy
A Mean Reversion Strategy is a trading strategy that assumes the price of an asset will revert back to its mean or average price.
Mean Squared Error
Mean Squared Error (MSE) is a measure of the average squared difference between the predicted and actual values in a forecasting model.
Mean-Variance Analysis
Mean-Variance Analysis is a method for determining the optimal portfolio allocation that maximizes expected return for a given level of risk.
Mean-Variance Optimization
Mean-Variance Optimization is a method for selecting portfolio weights that maximize the expected return for a given level of risk.
Minimum Tick Size
Minimum Tick Size is the minimum price increment at which a security can be quoted or traded on a particular exchange.
Model Validation
Model Validation is the process of assessing the accuracy and reliability of a financial model.
Monte Carlo Simulation
Monte Carlo Simulation is a technique for estimating the probability of different outcomes in a process by simulating random samples.
Moving Average
Moving Average is a statistical technique used to analyze data points by creating a series of averages of different subsets of the full data set.
N
Neural Network
A Neural Network is a type of machine learning model that is loosely inspired by the structure and function of the human brain.
Neural Networks
Neural Networks are a type of machine learning algorithm inspired by the structure and function of biological neural networks.
O
Optimal Execution
Optimal Execution refers to the process of executing trades in a way that minimizes market impact and transaction costs.
Order Book
The Order Book is a record of all buy and sell orders for a particular trading instrument on an exchange.
Order Flow
Order Flow is the direct flow of buy and sell orders for a trading instrument.
Order Management System
An Order Management System (OMS) is a software application used by traders to manage the flow of orders, including order routing and execution.
Order Management System (Oms)
Order Management System (OMS) is a software application used by traders to manage and route orders to financial exchanges or brokers.
Order Routing
Order Routing is the process of selecting the best execution venue or market for executing a trade.
Out-Of-Sample Testing
Out-of-sample Testing is the evaluation of a model's performance on data that was not used for training.
Overfitting
Overfitting refers to a model that is trained too well on the training data and performs poorly on new, unseen data.
P
Pair Trading
Pair Trading is a strategy that involves taking long and short positions in two highly correlated securities to profit from temporary price divergences.
Pairs Trading
Pairs Trading is a strategy that involves trading two correlated instruments simultaneously to profit from relative price movements.
Portfolio Backtesting
Portfolio Backtesting is the process of testing a portfolio strategy against historical market data to evaluate its performance.
Portfolio Optimization
Portfolio Optimization is the process of selecting the best combination of assets to achieve a desired risk-return profile.
Position Sizing
Position Sizing is the process of determining the size or number of shares or contracts to trade based on risk management parameters.
Price Action
Price Action refers to the movement or behavior of a security's price over time, often analyzed through technical analysis.
Principal Component Analysis (Pca)
Principal Component Analysis is a statistical technique used to reduce the dimensionality of a large data set.
Program Trading
Program Trading is the execution of a large number of trades simultaneously, typically using automated trading systems.
Q
Quantitative Analysis
Quantitative Analysis involves using mathematical and statistical models to analyze market data and make trading decisions.
Quantitative Analyst
A Quantitative Analyst is a professional who applies mathematical and statistical techniques to financial and investment problems.
Quantitative Research
Quantitative Research involves developing and testing mathematical and statistical models to analyze financial markets.
Quantitative Trading
Quantitative Trading is a systematic approach to trading that relies on mathematical models and data analysis.
Quantpedia
Quantpedia is an online resource and database of quantitative trading strategies and research articles.
R
Rebalance
Rebalance is the process of adjusting the weights of assets in a portfolio to maintain the desired allocation.
Recurrent Neural Network (Rnn)
Recurrent Neural Network is a type of neural network that can process sequential data and has memory of past inputs.
Regulatory Compliance
Regulatory Compliance refers to the adherence to laws, regulations, and industry guidelines governing financial markets and securities trading.
Reinforcement Learning
Reinforcement Learning is a machine learning technique where an agent learns to make decisions through repeated trial and error and feedback from the environment.
Reversion To The Mean
Reversion to the Mean is the theory that prices and returns will eventually move back towards their historical average.
Risk Arbitrage
Risk Arbitrage is a trading strategy that seeks to profit from the price discrepancy between a target company's stock and the acquiring company's stock during a merger or acquisition.
Risk Management
Risk Management involves identifying, assessing, and minimizing potential risks in trading strategies.
Risk Parity
Risk Parity is a portfolio allocation strategy that seeks to allocate risk equally across different asset classes.
Risk-Free Rate
The Risk-Free Rate is the theoretical rate of return of an investment with no risk, typically approximated by government bond yields.
S
Seasonality
Seasonality refers to recurring patterns or cycles in a security's price or performance that are associated with certain seasons or time periods.
Securities Lending
Securities Lending is the practice of lending securities to another party, typically in exchange for collateral, for a specified period of time.
Sharpe Ratio
Sharpe Ratio is a measure of risk-adjusted return, calculated by dividing the excess return of an investment by its standard deviation.
Short Selling
Short Selling is the sale of borrowed securities with the expectation of buying them back at a lower price in the future to make a profit.
Sliding Window
A Sliding Window is a technique used in time-series analysis to analyze data in a moving time frame.
Slippage
Slippage is the difference between the expected price of a trade and the price at which the trade is executed.
Slippage Cost
Slippage Cost is the cost incurred due to the difference between the expected execution price and the actual execution price of a trade.
Slippage Model
A Slippage Model is a mathematical model used to estimate and predict the level of slippage in executing trades.
Smart Order Routing
Smart Order Routing is an automated process used by trading systems to select the optimal execution venue based on current market conditions.
Statistical Arbitrage
Statistical Arbitrage is a strategy that involves identifying and exploiting pricing inefficiencies between related securities.
Stop Loss Order
A Stop Loss Order is an order to close a position and limit losses once the price reaches a specified level.
Stop Order
A Stop Order is an order to buy or sell a security once its price reaches a specified trigger price.
Stop-Limit Order
A Stop-Limit Order is a type of order that combines the features of a stop order and a limit order.
Stop-Loss Order
A Stop-Loss Order is a type of stop order used to limit losses by automatically selling a security if its price falls below a specified level.
T
Take Profit Order
A Take Profit Order is an order to close a position and realize profits once the price reaches a specified level.
Take-Profit Order
A Take-Profit Order is an order to sell a security once its price reaches a specified level to lock in profits.
Technical Analysis
Technical Analysis involves analyzing historical market data, such as price and volume, to identify patterns and make trading decisions.
Technical Indicator
Technical Indicator is a mathematical calculation or graphical representation used to analyze historical price and volume data.
Tick Data
Tick Data is a type of market data that represents individual trade prices and volumes at a given point in time.
Time Weighted Average Price
Time Weighted Average Price (TWAP) is a trading algorithm that executes trades evenly over a specified time period to minimize market impact.
Trading Signal
A Trading Signal is a trigger or indication to execute a specific trade based on a predefined set of rules or conditions.
Trading Strategy
Trading Strategy is a predefined set of rules for making trading decisions, based on technical or fundamental analysis.
Transaction Cost
Transaction Cost refers to the cost associated with executing a trade, including commissions, fees, and market impact.
Trend Following
Trend Following is a trading strategy that aims to profit from continued price movements in the same direction.
Trend-Following Strategy
A Trend-following Strategy is a trading strategy that aims to buy an asset when its price is rising and sell when its price is falling.
U
Underfitting
Underfitting refers to a model that is too simple to capture the underlying patterns or relationships in the data.
V
Value-At-Risk (Var)
Value-at-Risk (VaR) is a statistical measure used to estimate the potential loss on an investment portfolio over a given time period.
Volatility
Volatility is a statistical measure of the dispersion of returns for a given trading instrument or market.
Volatility Trading
Volatility Trading is a strategy that aims to profit from changes in the volatility of a trading instrument or market.
Volume Weighted Average Price
Volume Weighted Average Price (VWAP) is a trading algorithm that executes trades based on the volume-weighted average price to minimize market impact.
Volume Weighted Average Price (Vwap)
Volume Weighted Average Price (VWAP) is a trading benchmark that measures the average price at which a security is traded throughout the day, weighted by trading volume.
W
Wash Trading
Wash Trading is the illegal practice of buying and selling the same security to create artificial trading activity and inflate volume or prices.