Electronic Markets and Trading Algorithms

Abstract

Academics attempt to understand the consequences of fragmentation, electronic markets and trading algorithms. Practitioners, by necessity, devise ever-improving trading algorithms to achieve their trading objectives. This paper is a bridge of sorts. I use the structural approach developed in decades of research on price formation to illuminate modern electronic trading practices and algorithms. I argue that despite the constantly changing trading landscape driven by technology improvements, the economic tradeoffs embedded in trading algorithms are, for all intents and purposes, not different from manual trading. All that has changed is the implementation.