Buzzwords Demystified: Systematic vs Automated vs Algorithmic vs Quantitative vs Machine
Welcome
Hello and welcome to our third article. This issue explains the different terms used for automated i.e. non-manual trading. We also touch on High Frequency Trading. All articles are saved at our Medium page and on the IQT website, which has a clickable version of the map of all articles: https://theiqt.com/blog.
These articles are based on my experience from consulting and product development at The IQT. Do let us know if there are topics you would like us to cover, questions you would like to resolve, or if there are insights you would like to share from your own experience.
Last Time
In Article 2 — “The Spectrum of Automation”, we defined a range in the level of automation possible in trading, ranging from fully manual to semi-manual, then semi-automated and fully automated. Increased profitability is possible from increasing automation.
Overview
This time we will discuss the following:
1) multiple terms exist for largely the same thing i.e. “Automated”, “Systematic”, “Algorithmic”, “Quantitative” and “Machine” as applied to trading.
2) Algorithmic Trading does not always entail HFT. HFT is a subset of Algorithmic Trading.
Main Points
1) “Automated” is the clearest description of non-manual trading, but multiple terms exist.
From now on we will adopt the term “Algorithmic Trading” as it is the most commonly used.
Some people use “systematic” trading to always mean “automated” trading. As we noted in Article 1 — “Trading Systems and Systematic Trading”, “systematic” can mean manual trading with a rules-based approach. So we use “systematic” to mean all rules-based trading, whether trading manually or automatically, which is the spirit of our meetup group, the London Systematic Traders.
Similarly, the other terms have certain nuances:
· “Algorithmic” implies usage of algorithms which is linked to the field of Computer Science.
· “Quantitative” implies usage of quantitative modelling techniques as in Quantitative Finance and Financial Econometrics.
· “Machine” implies usage of techniques from the fields of AI (Artificial Intelligence) and ML (Machine Learning).
· Note that ML is really a subset of AI. There is a nice picture (reproduced below) and explanation of the fields along with Data Science at: https://www.sciencedirect.com/topics/physics-and-astronomy/artificial-intelligence:
2) There is a tendency to think that Algorithmic Trading always means High Frequency Trading (HFT). HFT is just a subset of Algorithmic Trading.
· HFT typically refers to trades with timeframes of less than 1 second.
· Algorithmic trading can be applied for trades over any timeframe, even up to weeks.
· One might say that medium frequency trading has timeframes of 1 minute to 1 day, and low frequency trading has even longer timeframes. These are not standard terms but people would roughly understand them.
Further Reading
In Article 4 — “A Detailed Look at The Trading Process”, we will examine the trading process in more detail.
Happy trading!
