Types of Electronic Traders

Electronic trading strategies are most effective because they act on information extremely fast. They have been adopted by proprietary traders, buy-side traders, and the automated brokers that serve the systems.

Electronic proprietary traders consist of high-frequency and low-latency traders.

The major types of electronic traders include:

1. Electronic news traders: These are traders who profit from news services. They subscribe to a high-speed automatic news feed. They analyze the news very fast and decide whether the information they have will be moved to the market or not. These traders use natural language processing techniques when the report consists of non-quantitative data.
2. Electronic dealers: These are traders who make a profit from their market spreads. When they receive a sign that prices might move against their inventory positions, they instantly liquidate their positions by operating on the opposite side to reduce their exposure. They also monitor scheduled news releases and cancel their orders when necessary.
3. Electronic front runners: These are low-latency traders who use artificial intelligence to find out when large traders or fragments want to fill orders on the same side of the market. They purchase when they think that an imbalance of buy orders over sell orders will cause the market to move up and sell when they feel the imbalance will lower the demand.
4. Electronic arbitrageurs: These are traders who monitor several markets looking for arbitrage opportunities to buy an undervalued item and sell a similar overvalued item.
5. Electronic quote matchers: These are traders who exploit the option value of standing orders. These options are important to quote matchers because they allow them to take positions with limited losses. They buy when they believe that they can rely on standing buy orders to get out of their positions and sell when they can depend on standing sell orders.

Question

Low-latency traders, who use artificial intelligence to find out when large traders or fragments want to fill orders on the same side of the market, are best known as:

1. Electronic front runners.
2. Electronic dealers.
3. Electronic new traders.

Solution

The correct answer is A.

Electronic front runners are low-latency traders who use artificial intelligence to find out when large traders or fragments want to fill orders on the same side of the market. They purchase when they think that an imbalance of buy orders over sell orders will cause a market to move up and sell when they feel the imbalance will lower demand.

B is incorrect. Electronic dealers are traders who make a profit from their market spreads. When they receive a sign that prices might move against their inventory positions, they instantly liquidate their positions by operating on the opposite side to reduce their exposure. They also monitor scheduled news releases and cancel their orders when necessary.

C is incorrect. Electronic new traders are traders who profit from news services. They subscribe to high-speed automatic news feed. They analyze the news very fast and decide whether the information they have will be moved to the market or not. These traders use natural language processing techniques when the report consists of non-quantitative data.

Reading 46: Trading Cost and Electronic Markets

LOS 46 (f) Distinguish among types of electronic traders.