Algorithmic Trading Glossary

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When a primary exchange puts the market into “auction” mode customers can send orders to but not complete trades on the exchange until normal trading is resumed.  The exchange typically moves a stock into a pre-auction phase and then holds an auction if something out of the ordinary is affecting a company; the aim being to give people breathing room and let things settle to prevent disorder in the market.  For that reason, many brokers' smart order routers are programmed to stop trading when a stock goes into the pre-auction phase and often directs order flow only to the primary exchange during an auction phase.  The auction phase is typically five minutes long but it can last longer....more

The European Economic Area (EEA) comprises the EU states plus the remaining members of the old European Free Trade Area (EFTA; Iceland, Liechtenstein and Norway) that decided against leaving that organisation to join the EU....more

Front-running generally refers to the illegal practice of a broker placing and executing orders on a stock on its own account with advance knowledge of orders pending from its clients which would affect the price of the stock....more

Best Execution refers to the responsibility of brokers to provide the most advantageous, or best price, order execution for customers. For retail clients, price is the only factor for Best Execution....more

  Volatility is a measure of the statistical dispersion of returns for a given asset. Volatility refers to the amount of uncertainty about the scale of changes in the price. A higher volatility means that the price can be spread out over a larger range of values, and that it could change drastically over a short time period in either direction....more

Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates. The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread....more

  The Shooting Star formation is a technical analysis chart pattern. The Shooting Star is a bearish formation. It represents the opposite of the Inverted Hammer formation. It occurs in an upper trend which indicates that the market opens at the lows of the session, rallies and pulls back to the bottom....more

The Inverted Hammer formation is a technical analysis chart pattern. The Inverted Hammer is a bullish formation. It represents the opposite of the Shooting Star formation. Three criteria establish an Inverted Hammer formation:   A real body that is at the lower end of the trading range (body color is not important). A long upper shadow, which should be twice the height of the height of the real body. A very short, if any, lower shadow. An ideal Inverted Hammer formation is one that occurs after a downtrend or at the bottom of a congestion zone....more

The Hanging Man formation is a technical analysis chart pattern. The Hanging Man is a bearish formation. It represents the opposite of the Hammer formation. It is called a Hanging Man because it looks like a hanging man with dangling legs. Three criteria establish a Hanging Man formation: A real body that is at the upper end of the trading range (body color is not important). A long lower shadow should be twice the height of the height of the real body. A very short, if any, upper shadow....more

The Hammer formation is a technical analysis chart pattern. The Hammer is a bullish formation. It represents the opposite of the Hanging Man. It is called a Hammer because the market is effectively hammering out a bottom....more

The Bullish Engulfing formation is a technical analysis chart pattern. Bullish Engulfing is a bullish formation, representing the opposite of the Bearish Engulfing formation. Three criteria establish a Bullish Engulfing formation: The market has to be in a clearly definable down-trend, even if the trend is short term. Of the 2 candlesticks in the formation, the second candle's real body must engulf the first candle's real body The second real body of the formation should be "up" while the first real body should be "down"....more

The Bearish Engulfing formation is a technical analysis chart pattern. Bearish Engulfing is a bearish formation, representing the opposite of the Bullish Engulfing formation. Three criteria establish a Bearish Engulfing formation: The market has to be in a clearly definable up-trend, even if the trend is short term. Of the 2 candlesticks in the formation, the second candle's real body must engulf the first candle's real body The second real body of the formation should be "down" while the first real body should be "up".  ...more

The Long Put Ladder is a limited profit, unlimited risk strategy in options trading. The Long Put Ladder is used when the trader believes that the underlying will not experience much volatility in the near term....more

The Long Call Ladder is a limited profit, unlimited risk strategy in options trading. The Long Call Ladder is used when the trader believes that the underlying will not experience much volatility in the near term....more

Black box is a term for a system or algorithm which takes input and produces output (orders or quotes in trading terms) while its internal logic and operation remains hidden....more

The Strip is a more bearish version of the common Straddle. It involves buying a number of At-the-Money calls and twice the number of puts of the same underlying stock, strike price and expiry month. Buy 1 ATM Call Buy 2 ATM Puts Strips have unlimited profit potential and limited risk....more

A Christmas Tree is an options trading strategy which is generally constructed by purchasing one call option and selling two other call options at different (higher) strike prices. When drawn structurally, the strike price of the long option is located below the two successively higher written calls and loosely resembles a Christmas tree.  This strategy is used when an investor believes the stock is going to make a move higher....more

Drawdown is the peak-to-trough decline during a specific record period of an investment or investment strategy. A drawdown is usually quoted as the percentage between the peak and the trough....more

  Legging risk is the risk of not being able to fulfil a particular leg of a spread or strategy at the price required. This occurs when the trader is not trading an exchange traded strategy, but has determined a spread price composed of legs which are individually tradable instrument on an exchange, or across exchanges....more

  The Financial Information eXchange ("FIX") Protocol is a series of messaging specifications for the electronic communication of trade-related messages. FIX has been developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. Since its creation in 1992, the FIX protocol has become the de-facto messaging standard for pre-trade and trade communication globally within the Equity markets, and is now experiencing rapid expansion into the post-trade space, and continues to expand across the Foreign Exchange, Fixed Income and Derivative markets. The development of the FIX Protocol is primarily due to the voluntary efforts of its member firms from the buy-side, sell-side, vendor and exchange communities who work together through a series of committees, subcommittees, and working groups, all overseen by a FIX Global Steering Committee. The FIX protocol currently sits at Version 5.0....more

A Bear Call Spread is composed of a long call option at one strike price (OTM), and a short call at a lower price (ITM). A Bear Call Spread targets a moderate decrease in the value of the underlying.  This spread is a credit spread, in that it results in a net credit to the trader....more

In general terms "algorithmic trading" means the use of a predefined set of rules written into computer code to automate the process of buying or selling.  By this general definition, the term algorithmic trading could apply to any computer generated market operation....more

The Butterfly spread is a direction neutral option strategy. The Long Butterfly is a combination of a Bull Call Spread and a Bear Call Spread. It is a limited profit, limited risk strategy....more

A Dividend Swap is a financial instrument where two counterparties contract to exchange a set of future cash flows ("legs") at set dates in the future. One counterparty agrees to pay the other the future dividend flow on a stock or basket of stocks in an index, in return for which the other counterparty gives the first call options. Dividend Swaps are generally traded over the counter (OTC) rather than exchange traded....more

  The Black-Scholes model is a tool for pricing equity options. The idea behind the Black-Scholes model is that the price of an option is determined implicitly by the price of the underlying stock....more

Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator in technical analysis. MACD shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA (the "Basic")....more

The Support level is the price level below which a stock has had difficulty falling over a period of time. It is considered as the level where many buyers tend to enter the stock....more

Statistical Arbitrage, commonly referred to as "StatArb", is a profit situation which arises from a pricing difference between two securities. StatArb differs slightly from "Arbitrage", in that the trading strategy cannot guarantee the delivery of profit, and therefore is not considered free from exposure to risk. Additionally, StatArb is sometimes referred to as a "Mean Reversion" strategy, given it's dependance on a security's return to historical trading patterns....more

Executes an order evenly over a user defined time period. Like VWAP, this strategy manages the inventory of the order through to the end of the user defined period. Unlike VWAP, scheduling is done on an even basis during the chosen period, rather than trying to anticipate the volume curve of the period as VWAP does....more

The Debt-to-Equity ratio is a measure of leverage, equal to total debt divided by shareholders' equity. It indicates the relative proportion of debt to equity, and how they are used to finance the company's assets....more

Black box is a term for a system or algorithm which takes input and produces output (orders or quotes in trading terms) while its internal logic and operation remains hidden....more

  Technical Analysis is a method of evaluating and predicting financial instrument price movements by analysing statistics generated by market activity, such as past prices and volume. Technical analysts believe that the historical performance of stocks and markets are indications of future performance....more

Elliott Wave Theory is a technical analysis principle named after Ralph Nelson Elliott, who concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves....more

The Inverted Hammer formation is a technical analysis chart pattern. The Inverted Hammer is a bullish formation. It represents the opposite of the Shooting Star formation. Three criteria establish an Inverted Hammer formation:   A real body that is at the lower end of the trading range (body color is not important). A long upper shadow, which should be twice the height of the height of the real body. A very short, if any, lower shadow. An ideal Inverted Hammer formation is one that occurs after a downtrend or at the bottom of a congestion zone....more

The European Economic Area (EEA) comprises the EU states plus the remaining members of the old European Free Trade Area (EFTA; Iceland, Liechtenstein and Norway) that decided against leaving that organisation to join the EU....more

When a primary exchange puts the market into “auction” mode customers can send orders to but not complete trades on the exchange until normal trading is resumed.  The exchange typically moves a stock into a pre-auction phase and then holds an auction if something out of the ordinary is affecting a company; the aim being to give people breathing room and let things settle to prevent disorder in the market.  For that reason, many brokers' smart order routers are programmed to stop trading when a stock goes into the pre-auction phase and often directs order flow only to the primary exchange during an auction phase.  The auction phase is typically five minutes long but it can last longer....more

Dark pools, defined in contrast to “lit” trading venues where trading intentions and activity are visible, provide access to non-displayed liquidity.  A dark pool is an OTC (over-the-counter) venue for reporting purposes, which has the practical value that unmatched trade orders are not displayed on an open order book.  The use of dark pools is typically found where disclosure of trading intent might prove injurious to price efficiency....more

Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates. The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread....more

  The Shooting Star formation is a technical analysis chart pattern. The Shooting Star is a bearish formation. It represents the opposite of the Inverted Hammer formation. It occurs in an upper trend which indicates that the market opens at the lows of the session, rallies and pulls back to the bottom....more