A to F
- Adverse selection
- The risk that the traders who fill your orders are better informed than you, so fills tend to come just before the price moves against you.
- Alpha
- Return that comes from skill or an informational edge rather than from general market movement.
- API
- Application programming interface. The machine-readable connection an exchange provides for market data and order entry.
- Arbitrage
- Buying and selling related instruments to profit from a price difference between them.
- Backtest
- A simulation of how a strategy would have performed on historical data.
- Basis
- The difference between the price of a derivative, such as a future, and the price of its underlying asset.
- Bid-ask spread
- The gap between the highest price a buyer will pay and the lowest price a seller will accept.
- Co-location
- Placing trading servers in the same data centre as an exchange’s matching engine to reduce latency.
- Drawdown
- A decline from a previous peak in the value of a strategy or account.
- Fill
- The execution of all or part of an order.
- Funding rate
- A periodic payment between long and short holders of a perpetual future that keeps its price close to the spot price.
K to O
- Kill switch
- A control that stops all trading and cancels open orders immediately.
- Latency
- The time taken for data or an order to travel between systems.
- Limit order
- An order to buy or sell at a specified price or better.
- Liquidity
- How easily an asset can be traded in size without moving its price.
- Maker and taker
- A maker adds a resting order to the book; a taker trades against one. Venues often charge them different fees.
- Market impact
- The movement in price caused by your own trading.
- Market maker
- A participant that continuously quotes both buy and sell prices.
- Mean reversion
- The tendency of a price to move back towards an average after moving away from it.
- Momentum
- The tendency of assets that have been rising, or falling, to continue doing so for a time.
- Order book
- The list of resting buy and sell orders on a venue, organised by price.
- Overfitting
- Tuning a model so closely to past data that it captures noise rather than a real effect.
P to Z
- Perpetual future
- A futures contract with no expiry date, common in digital-asset markets.
- Position sizing
- Deciding how large a position to take, usually based on risk rather than conviction.
- Pre-trade controls
- Automatic checks every order must pass before it is sent to a venue.
- Reconciliation
- Checking that a system’s internal records of orders, fills and balances match the venue’s records.
- Sharpe ratio
- Excess return divided by the volatility of returns.
- Slippage
- The difference between the expected price of a trade and the price actually achieved.
- Statistical arbitrage
- Trading on statistical relationships between instruments, expecting deviations to correct.
- TWAP
- Time-weighted average price. An execution approach that spreads an order evenly over time.
- VWAP
- Volume-weighted average price. An execution approach and benchmark weighted by traded volume.
- Walk-forward testing
- Repeatedly fitting a model on one period and testing it on the following period.
Sources and further reading
- Staff Report on Algorithmic Trading in U.S. Capital Markets · U.S. Securities and Exchange Commission
- FX execution algorithms and market functioning · Bank for International Settlements, Markets Committee
This article is for general information and education only. It is not investment advice, and it does not describe or solicit any product or service.