while minimizing market impact. In a way, these are also the basic three
steps of the evolution of trading with most market participants continuing to
innovate and grow in all three dimensions. Note that this maturation is
taking place both in terms of technology as well as financial modeling and
analytics, since they go hand in hand. Kend all Kim’s book discusses all three
areas of trade automation and innovation in detail, with particular focus on
electronic and algorithmic trading, providing research figures and statistics
throughout to enrich the reader’s experience.
The first three chapters of the book introduce the reader to key concepts,
the trade life cycle, and factors driving the growth of electronic trading in
recent years. The book begins with Chapter 1: Overview of Electronic and
Algorithmic Trading, which defines important ideas and gives a historical
perspective on the emergence of program and algorithmic trading. We learn
how decimaliz ation, which changed the way the New York Stock Exchange
quoted security prices, impacted the market, and how Electronic Communi-
cation Networks (ECNs) and multilateral trading facilities (MTFs) emerged
to compete with monopolistic central exchanges. The chapter covers different
aspects of elect ronic trading, such as duration averaging, dynamic hedging,
and index arbitrage, and touches on the connectivity protocol known as
FIX (Financial Information Exchange), which is the technological basis for
increased connectivity. Chapter 2: Automating Trade and Order Flow covers
the trade life cycle from beginning to end. It highlights the major steps in the
trade life cycle, such as trade confirmation, settlement, and reconcil iation.
It argues that changing back -office processes are, in fact, key enabler s of
financial innovation. It gives perspective on the automation of trading from
both a technology and a management point of view, describing important
concepts such as direct market access (DMA), smart order routing, and
straight-through processing (STP). Chapter 3: The Growth of Program and
Algorithmic Trading reviews statistics like average daily volume (ADV) whose
exploding number is attributable to the rising prevalence of program and
algorithmic trading. The chapter also studies the correlation between the rise
in program trading and the increase in IT spending in the financial services
industry.
Chapter 4: Alternative Execution Venues explains the drivers behind the
need for these new venues, such as speed of execution, regulatory pressures,
cost savings, direct market access (DMA), and the desire for anonymity. The
chapter compares the electronic trading networks to exchanges, and discusses
economic disadvantages of the latter, including factors like monopoly and
externalities, which created the need for alternative securities markets. Fi-
nally, it reviews various exchanges globally that are likely to be most affected
by the growth of execution venues.
xvi Series Preface