Historical review of algorithmic trading

Also in 1980s, programmed trading was applied to portfolio insurance. Portfolio insurance is a synthetic put option, which replicates the stock portfolio by dynamically trading stock index futures according to the computer model based on Black-Scholes option pricing model.

These two strategies, commonly referred to as "programmed trading", are blamed by many people for creating and aggravating the 1987 stock market crisis.

In the late 1980s and 1990s, with the development of telecommunication network, the financial market became completely electronic. In the United States, the percentage point pricing reform changed the minimum variable price per share from116 (0.0625) to 0.0 1. This changes the microstructure of the market, makes the bid-ask spread smaller, inhibits the trading advantage of market makers, and thus reduces the liquidity of the market. But this reform may have promoted the development of algorithmic trading.

The decrease of market liquidity urges institutional investors to split trading orders according to computer algorithms, so that orders can be traded at a more favorable average price. The benchmark of average price can be time-weighted average price (TWAP), and the commonly used benchmark price is volume-weighted average price (VWAP).

With the emergence of more and more electronic trading markets, other algorithmic trading strategies have gradually become possible, including spot arbitrage, statistical arbitrage, trend tracking and mean regression. It is more convenient to realize these trading strategies with computers, because computers can respond more quickly to fleeting mispricing and monitor the prices of multiple markets in real time at the same time.