Quantitative Trading, 2nd Edition

CHAPTER 5Execution Systems

At this point, you should have backtested a good strategy (maybe something like the pair-trading strategy in Example 3.6), picked a brokerage (e.g., Alpaca or Interactive Brokers), and have set up a good operating environment (at first, nothing more than a good computer and a high-speed internet connection). You are almost ready to execute your trading strategy—after you have implemented an automated trading system (ATS) to generate and transmit your orders to your brokerage for execution. This chapter is about building such an automated trading system and ways to minimize trading costs and divergence with your expected performance based on your backtests.

WHAT AN AUTOMATED TRADING SYSTEM CAN DO FOR YOU

An automated trading system will retrieve up-to-date market data from your brokerage or other data vendors, run a trading algorithm to generate orders, and submit those orders to your brokerage for execution. Sometimes, all these steps are fully automated and implemented as one desktop application installed on your computer. Other times, only part of this process is automated, and you would have to take some manual steps to complete the whole procedure.

A fully automated system has the advantage that it minimizes human errors and delays. For certain high-frequency systems, a fully automated system is indispensable, because any human intervention will cause enough delay to seriously derail the performance. A fully automated system used to be complicated ...