Nerds on Wall Street: Math, Machines, and Wired Markets

3.4. From Order Pad to Algos

The first direct-access tools from the sell side were single-stock electronic order pads, followed shortly by lists. The next step was breaking those orders down into pieces small enough to execute electronically, and spreading them out in time. Innovative systems like ITG's QuantEx, discussed in Chapter 7, allowed traders without large software staffs to use and define analytics and rules to control electronic trading. This began to look like what we consider to be algorithmic trading today.

The big news in algorithmic trading in the late 1980s was that you could do it at all. The first algo strategies were based on simple rules, like "send this order out in 10 equal waves, spaced equally in time from open to close." But these were predictable and easy to game by manipulating the price on a thin name with a limit order placed just before the arrival of the next wave, getting bagged in classic "Spy vs. Spy" style. There was little or no mathematical underpinning, just rules of thumb and educated guesses.