Algorithmic Trading

Since the continuous implementation of computerized exchange, the rise of algorith-mic trading has brought a profound impact and change on the develpoment of the futuresmarket.The reduction of transaction size caused by decimalization has accelerated the devel-opment of algorithmic trading,and conversely,the algorithmic trading has further reduced thetransaction size.Competition between stock exchanges has been increasingly intense, and thespeed of transaction has been increasingly fast. In 2005, the expenditures of money that thefinancial industry spent on computers and softwares are up to 264 billion dollars.This is a review articles about futures trading, and it is divided into three parts. Thisarticle mainly discusses the background of futures trading, the types of futures trading, andthe procedure of futures trading market,also the methods of analysis of quotation and thefactors to be considered. In addition, we also discuss the thing that introducing the geneticalgorithm into the electronic futures trading to optimize this trading.The first part is an introduction, which summarizes the the background and significanceof futures trading, as well as the general framework of this article. The development offutures market has very important role,and historically, the development of futures marketresulted from the physical market's needs. The basic role of the futures market include hedg-ing against in?ation, avoiding risk and issuing price. In fact, the occurrence and existance offutures market is a kind of rectification and complement to the defects of the spot market ,andas far as the spot market is concerned, these defects are inherent and can not be overcomed.It can be described that the spot market become perfect because of the futures market.The second part elaborates the futures trading,including the arising and development offutures market at home and abroad,as well as the four procedures of futures trading,that is,openning an account and placing an order,bidding, clearing and settlement and delivery. Thefirst session of futures trading is opening an account and placing an order. Only the membersof futures exchanges can make deals directly in the futures exchanges,so investors shouldchoose an excellent futures company and register its members before making futures deals.After this, the investors can apply for openning an account to that company. Actually, doingthis is to establish the legal relationship between investors and the futures companies, and to give the trading arders to the sta? in accordance with the customers'requirements. The sec-ond session of the futures trading is bidding,and this is the key procedure of futures trading.There are two ways to form the price of futures contracts, open-outcry and making a dealthrough computer. Open-outcry belongs to the traditional methods. But with the develop-ment of information technology, more and more exchanges has begun to use the computers tomake transactions. The third session of the futures trading is settlement. Settlement meansthat making a fund clearing and transfer to the situation of profit and loss on both side ofdealers according to the price issued by futures exchanges. Di?erent exchanges adopt dif-ferent method of settlement. The last session of futures trading is delivery. In the practiceof futures trading, most of the futures tradings know the obligation of contracts through thehedge performance functions,and only a small percentage need delivery, so delivery is not anecessary part of trading process.In the end of the second part, we discuss the methods of futures market analysis , whichis the key point of this article. They are the basic analysis and the technical analysis. Thebasic analysis is the one which predicts the price trend on the basis of the output of com-modities,the quantity of sales, the inventory level, the relations between supply and demandof goods and the factors in?uencing the changes of the relations between supply and de-mand.While the technical analysis is the one that the traders judge the price trends of thefutures using the existent technical materials, such as the transaction price and its volatility,trading volume and open interest, etc. We can also say that this method is to predict the pricetrends of futures through analysising the continuous changing graphic of the price and itsindex. This two methods analysis the price trends of tutures market from di?erent perspec-tives. Basic analysis focusing on macroeconomic factors, is to judge the mid and-long-termtrend of futures price.But the futures price is in?uenced by many factors, sometimes it is verydi?cult to tell which are the major factors and which are the secondary factor, so it is noteasy to know which factors have a decisive e?ect on the price changes. Technical analysisfocusing on historical transactions records,is to judge the the short or medium term trendsof futures price.Unfortunatly,the technical diagrams and charts are always in advanced orlagged when telling the signal of buying or selling,and these make it di?cult for investors toresearch and judge the trend. These two methods have their own advantages and disadvan-tages,when forecasting the futures'price trends, we should combine the two methods and take a good use of their advantages to make our prediction more accurate.The third part mainly discusses the application of genetic algorithm in futures trading,and this is another key point of the article. First and formost, we present the specific steps ofgenetic algorithm, including seven steps .1). Encoding to create the initial group and convert it into machine code which is easyto memory;2). Determining the fitness function, and make all the units in the group do the fitnesscalculation;3). Evaluating the result of fitness calculation;4). Choosing the best according to the results of fitness options,;5). Making the chosen individual do the cross-breeding;6).Introducing the variation system during the cross-breeding.7). Going back to the second step when breeding a new group, and continuing iteration.Then we discusses how the genetic algorithm is applied into the decisive-assistant sys-tem of the futures trading. This system is achieved through using the neural network modeland a parallel learning method used by a robot with several agents and combining with ge-netic algorithm. Its essence lies in the machinary learning of genetic algorithms, especiallythe classifier system's sccessful application in many fields. Algorithm itself is not di?cult,but in terms of the achievement of this algorithm in the futures tradings, a lot of changeablefactors should be taken into account,so here, we only give the idea but not the examples.Finally, I'd like to propose some expections of myself.Speaking of the resaerch on fu-tures markets in the future,I really hope that we should apply more algorithms into the se-lection and elimination of the methods of trading or arbitraging. The purpose of doing thisis to make the practical system of futures trading more close to practical application. At thesame time, we should also consider whether the introduction of more complicated modelsand intelligent processes can make the models failure. After solving the above problems,the trading system will help futures operators take the opportunities and make importantdecisions.Although there is no innovations both in theory and in practice,I still hope that thisarticle can help more and more people know the futures market and enhance their under-standing of futures market, and even make them involved in the futures market to promote the development of futures market.