At about the same time portfolio insurance was designed to create a synthetic put option on a stock portfolio by dynamically trading stock index futures according to a computer model based on the Black–Scholes option pricing model.
Both strategies, often simply lumped together as "program trading", were blamed by many people (for example by the Brady report) for exacerbating or even starting the 1987 stock market crash.
to send small slices of the order (child orders) out to the market over time.
They were developed so that traders do not need to constantly watch a stock and repeatedly send those slices out manually.
As a result of these events, the Dow Jones Industrial Average suffered its second largest intraday point swing ever to that date, though prices quickly recovered.
(See List of largest daily changes in the Dow Jones Industrial Average.) A July, 2011 report by the International Organization of Securities Commissions (IOSCO), an international body of securities regulators, concluded that while "algorithms and HFT technology have been used by market participants to manage their trading and risk, their usage was also clearly a contributing factor in the flash crash event of May 6, 2010." Computerization of the order flow in financial markets began in the early 1970s, with some landmarks being the introduction of the New York Stock Exchange's “designated order turnaround” system (DOT, and later Super DOT), which routed orders electronically to the proper trading post, which executed them manually.
Yet the impact of computer driven trading on stock market crashes is unclear and widely discussed in the academic community.
Algorithmic trading and HFT have resulted in a dramatic change of the market microstructure, particularly in the way liquidity is provided.Popular platforms for algorithmic trading include Meta Trader, Ninja Trader, IQBroker, and Quantopian.Algorithmic trading is not an attempt to make a trading profit.Popular "algos" include Percentage of Volume, Pegged, VWAP, TWAP, Implementation Shortfall, Target Close.In the past several years algo trading has been gaining traction with both retails and institutional traders.
Many fall into the category of high-frequency trading (HFT), which are characterized by high turnover and high order-to-trade ratios.