Algorithmic Trading Glossary | Quantra by QuantInsti

Aggregator

Aggregator is a system used to aggregate liquidity from several liquidity providers. Retail aggregators packet small retail trades into larger trades that can be handled conveniently by banks. Some retail aggrega

Algorithm

An algorithm is a sequence of unambiguous instructions to obtain a required output for any legitimate input within a finite amount of time. Algorithms have a defined beginning where the input data is processed using a de

Algorithmic trading

Algorithmic trading, also known as black-box trading in some cases, or simply algo trading, is the process of placing orders in the market based on a certain trading logic via online trading terminals, which execute the

Algorithmic Trading Platform

A trading platform is a software where there is live streaming of market prices of various financial products. The traders can open or close trading positions as per the requirements on the algorithmic trading platform.

All-Or-None Order

An AON order is an order to buy or sell a stock with instructions that the order can be executed completely or not at all. However, unlike the FOK orders, AON orders are those that need not be necessarily executed immedi

Alpha

Alpha is the measure of an investment’s performance compared to a certain benchmark. The excess return of the portfolio over the benchmark index is the portfolio’s alpha. If alpha is positive the investment h

Alternative Hypothesis

An alternative hypothesis is contrary to the null hypothesis, usually that the observations are the result of a real effect. Alternative hypothesis is the hypothesis that we actually test for in the hypothesis testi

Alternative Investment

An alternative investment is an investment in an asset that is not conventional. Examples of conventional investments are bonds, cash, and shares. Alternative investments may include real estate, private equity, hedge fu

American Option

An American option is an option contract that can be exercised anytime on or before its actual expiration date. It is relatively more valuable than its European counterpart as the contract offers flexibility, as it can b

Arbitrage

Arbitrage is the process of simultaneously transacting in multiple financial securities to make a profit from the difference in prices. This can be done in various ways such as the purchase and sale of same securities in

Arbitrageur

Arbitrageur is an investor who attempts to make a profit from price inefficiencies in similar financial instruments. In simple words, Arbitrageur is an individual or an organization who engages in arbitrage. Spottin

ARIMA

ARIMA stands for Auto-Regressive Integrated Moving Average. ARIMA is a stochastic modeling approach that can be used to predict the future values in time series. Let us understand each term AR, I and MA one by one. &nbs

Artificial Intelligence

It is the science and engineering of making intelligent machines, especially intelligent computer programs to calculate, reason, learn from experience, adapt to new situations and solve complex problems. Artificial Intel

Artificial Neural Network

Artificial Neural Network is an information processing paradigm which is used to study the behaviour of a complex system by computer simulation. It is inspired by the biological way of processing information by the human

Asian Option

An Asian option is an exotic option and is also called average-price option or average option. In Asian option, option payoff is dependent on the average price of the underlying asset, over a prespecified period, during

Ask Price

Ask price or offer price is the price that a seller is willing to accept to sell a security.

Ask size

Ask size is the number of shares that are being offered to sell at the ask price. Example If the ask in the market is $20*3000, this means the seller is willing to sell 3000 shares i.e ask size at a price of $20

At-The-Money Option

A call or put option is said to be at-the-money when the strike price is equal to the current price of the underlying asset (i.e. spot price = strike price). An at-the-money option has no intrinsic value but it may have

Augmented Dickey Fuller Test

Augmented Dickey Fuller test is the augmented version of dickey fuller test. The Augmented Dickey Fuller Test (ADF) is a unit root test for checking stationarity. The hypotheses for the test: The null hypot

Automated Trading

Automated trading refers to the complete automation of the trading process, which involves automation of decision making, order creation, order submission and order execution. It also includes quantitative modeling, risk

Automated Trading using MT5 and Python

This article is the first part of a two-part series. In this article, we'll talk about the setup you need and how you can get the data. Then, you can learn more about backtesting from Quantra. In the second part, we&

Autoregression (AR)

Autoregression is a time series model used in statistical analysis, which uses past observations as input to predict future values. An AR(p) model is an autoregressive model where specific lagged values of yt ar

Average Daily Traded Volume (ADTV)

Average daily traded volume is the average number of individual shares traded in a day over a specified period of time. When the average daily trading volume of a security is high, it is traded more actively and typicall

Backtest

Backtesting is the process of testing a trading strategy using historical data to determine the effectiveness of that strategy. Backtest results usually show the strategy’s performance in terms of some popular perf

Bank

Bank is a financial institution that accepts deposits and makes loans, acting as an intermediary between financial institutions. Banks may also provide services such as insurance, wealth management, currency exchange, et

Bayes' Theorem

Bayes' theorem alternatively known as Bayes' law or Bayes' rule is named after Thomas Bayes (statistician and philosopher). Thomas Bayes described the probability of an event, based on prior knowledge of

Bear

A bear is an investor who believes that a security or the market as a whole will decline in the subsequent time. Bears are generally pessimistic about the market and sell securities in the expectation that prices are lik

Bear Spread

A bear spread is an options trading strategy. It is used by the traders who seek profit when the price of the underlying security declines. The strategy involves simultaneous purchase and sale of options. Both

Beta

Beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In general, a beta more than 1 indicates that the portfolio or security is more volatile than the market, while a b

Betting Against Beta

Do you follow the conventional approach of buying risky assets for potentially higher returns? Well, this approach usually makes sense to most investors, but today we are here to show you how to build a strategy by doing

Bid Price

The bid price is the price that a buyer is willing to pay for a specific security.

Bid Size

Bid size is the number of shares buyer is willing to purchase at a given price. Example If you place an order to purchase 1000 shares of a company at $50 per share then the bid price is $50 and the bid size is 1

Bid-Ask Spread

Bid-ask spread is the difference between immediate best ask price and the immediate best bid price of a security. It is basically the difference between the lowest price a seller is willing to accept and the highest pric

Binomial Pricing

The binomial pricing model for options was first proposed by Cox, Ross and Rubinstein in 1979. This is the simplest technique used for option pricing, and because of the flexible nature of its design, binomial pricing ca

Black Box Trading

A black box trading or algorithmic trading or automated trading is a computerized trading system that utilizes pre-programmed logic to generate buy and sell orders. Black box system is named as such since the user need n

Black Scholes Merton

Black Scholes Merton model is a modified form of the Black Scholes model. All assumptions of Black Scholes model are applicable to Black Scholes Merton except for the one with a constant dividend yield throughout the lif

Black-Scholes

The Black-Scholes model was published in 1973 by Fischer Black and Myron Scholes. This model is used to calculate the theoretical price of options using five key determinants of an option’s price, that is stock pri

Bollinger Band

Bollinger band is a volatility or standard deviation based oscillator which comprises three components. The middle band is a moving average line and the other two bands are predetermined, usually two, stan

Bond

Bond is a fixed income security, using which a company or a government, known as bond issuer, raises debt from the investors, known as bond holders. Based on the bond indenture (contract), the issuer is obligated to pay

Bracket Order

Bracket order is designed where the investor can limit their loss and lock in profit by “bracketing” an order with two opposite side orders. Buy Bracket Order: A Buy order is bracketed by a sell limit order

Broker

A broker is a regulated entity that acts as an intermediary between buyers and sellers for both retail and institutional investors. Broker charges a fee or commission for executing orders submitted by an investor. Broker

Brownian Motion

Brownian motion is the simple continuous stochastic process used to explain a random process. An example of Brownian motion in finance is the fluctuation in an asset’s price. Other real life examples are the random

Bull

A bull is an investor who believes that a security or the market as a whole will rise for a subsequent period of time. Bullish investors are generally optimistic about the market and make investments based on his/her bel

Bull Spread

A bull spread is an options trading strategy used by the traders who want to seek profits when the price of the underlying security rises while limiting the losses. There are two types of Bull Spreads -

Butterfly Spread

A butterfly spread is a limited risk, neutral options trading strategy. Butterfly spread uses four options contracts with the same expiration but with three different strike prices. It can be constructed using eith

Buy Order

Buy order is an instruction given by an investor to a broker to buy a security. Buy order can be of different types. If an investor instructs the broker to buy immediately at the best available price i.e. at the ma

Calendar Spread

In calendar spread, we enter a long and a short position at the same time on the same underlying asset at the same strike prices, but with different expiration months. Also, both options are of the same type, meaning str

Call Option

A call option is an option contract that gives the buyer of the contract the right, but not the obligation, to purchase the underlying security at the strike price on or before (depending on

Callable Bond

A callable bond is a bond that gives issuer the right but not the obligation to redeem the bond prior to its maturity. When an issuer call its bonds, it pays investor the call price (face value of the bond + call premium

Cancel Order

Cancel Order is an instruction given by a trader to his broker or the exchange to not carry out an order which has already been placed, before it is executed on the exchange. Cancel order is important in case of limit or

Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model is a model that is used to calculate the expected rate of return on a particular asset. The return can be divided into two parts: Expected Return= Risk Free Rate of Return + β (M

Central Limit Theorem

The central limit theorem states that if sufficiently large random samples are taken from the population, then the distribution of these sample means will be approximately normally distributed. This holds true regardless

CEP engine

The CEP is the heart of the algorithmic trading platform – which listens to the market data and determines what actions to take based on the trading logic. Complex Event Processing combines data from multiple sourc

Chat GPT for Algo Trading

We'll explore the benefits of using ChatGPT for algo trading and show you how to get started in harnessing its capabilities. What is ChatGPT? ChatGPT is a language model developed by OpenAI. ChatGPT s

Classifier

An algorithm that implements a classification problem is known as a classifier. Different classification problems require different classifiers. One of the best methods to choose a classifier is to test out different cla

Clean Price

Clean price is the price of a coupon bond which does not include the accrued interest of coupon payments between the coupon payment dates. For calculating the clean price of a bond the future cash flows are discounted to

Closing Price

Closing price is the final price of a security at the end of the trading day. The closing price doesn’t necessarily mean the end of all trading on the security for the day. It simply means the floor of the exchange

Cointegration

Cointegration is an econometric technique used for testing the relationship between non-stationary time series variables. If two or more series’ are individually integrated (minimum number of differences required t

Cointegration based predictive model

We will discuss an important strategy that traders can deploy on cointegrated data. Cointegration is the basis of statistical arbitrage and can be considered a form of market inefficiency. Today, you will learn how to b

Colocation

A colocation is a data center facility in the exchange premises where the exchange’s servers are on the same network. It is used to rent space to trading firms to locate their servers and other computing hardware.

Common Stock

Common stock represents an ownership interest in a company. The holder of common stock shares the operating performance of the company since they own a part of the company by buying these common shares/equity. The most p

Conditional Probability

If event B is dependent on event A, then it is the case of conditional probability. One event must occur before another for it to be called conditional probability. For instance, there is a dependence of the auto

Condor

Condor is a limited risk, limited reward option trading strategy and is executed when the underlying is perceived to have less volatility. Condor spreads are made up of either all call options or all put options. This is

Confidence Interval

A confidence interval is a sample parameter, used to estimate the value of the population variable. In other words, it is a range of values within which a parameter lies with an associated probability. The degree of cert

Convertible bonds

A convertible bond gives a right to the bondholder to convert the bond into a fixed number of shares of the common stock, of the bond issuing company. The coupon rate of convertible bonds is generally lower than the regu

Correlation

Correlation is used to identify the strength as well as the magnitude of the relationship between two variables. It is an important measure as it provides a fair indication of the predictive relationship between the vari

Coupon

Coupon is the annual interest paid on the face value of a bond. Coupons are generally described in terms of coupon rate which is fixed over a period of time. The coupon rate is calculated by taking the sum of all coupons

Covariance

Covariance is used to measure the strength of joint variability between two variables. It signifies the degree to which the two random variables are in tandem or move together. Covariance can be positive, negative or zer

Covered Call

Covered call, also called ‘buy-write strategy’, involves holding a long position in an underlying asset and selling a call option for the same. The long position in the underlying asset is said to act as the

Credit Default Swap

A credit default swap is a type of swap in which the lender of a loan is given a guarantee against the non-payment of the loan. The seller of the CDS provides insurance to the lender in the sense that if the borrower def

Credit Rating

Credit rating is a third party assessment of the credit worthiness or credit risk of an individual, a corporation or a sovereign government. For a loan-seeking individual or company, its credit rating denotes whether it

Critical value

A critical point helps to determine whether to accept/reject the null hypothesis. It is a point on test distribution that is compared to the test statistic, and if the absolute value of the test statistic is greater than

Cross Connect

Cross Connections are hardware (cables, cords) that allow making a direct connection between separate units of the facilities within a data center. Single data centers or multiple data centers usually maintain the cross

Cross Validation

Cross-validation is a technique used to validate a model by checking the results of a statistical analysis on an independent data. It is one of the methods for assessing and choosing the best parameters in a prediction o

CTCL

Computer to Computer link (CTCL) is a trading facility provided by exchanges in India to their trading members using which members can use their own trading-end software in order to trade on the exchange trading system.

Currency Futures

Currency Future is a futures contract between two counterparties who agree to exchange one currency for another in the future at a particular price which is decided on the purchase date of the contract. These futures con

Currency Options

Currency options contract gives the buyer the right but not the obligation, to buy or sell the currency at a specified exchange rate on or before the expiration of the contract. Currency options market is the largest and

Currency Swap

A currency swap involves the exchange of principal and interest of a loan in one currency for a similar loan in another currency. The two organizations involved in the currency swap, periodically exchange cash in order t

Dark Pool

Dark pools are private networks for trading securities and private exchanges, which are generally developed by the institutional investors who wish to carry out block trades. As the name suggests, these orders

Data Science

Data Science is a multidisciplinary blend of data inference, algorithm development, and technology. It is largely used to extract knowledge either from structured or unstructured data. Mining large amount of data to iden

Day Order

Day order is an order to buy or sell a security that expires if it hasn’t been executed by the end of the trading day. A day order is cancelled if limit or stop order price is not met during the trading session. D

Debt

Debt is the amount of money borrowed by one party from another. The person who gives the funds is called the lender or creditor, while the one who borrows the money is called borrower or debtor. The lender agrees to lend

Deep learning

Deep learning is a Neural Network consisting of a hierarchy of layers, whereby each layer transforms the input data into more abstract representations. These series of layers, between input and output, identify the input

Delivery Volume

Delivery volume is the amount of shares delivered to the buyer out of the total traded volume. In simple words, the delivery volume is that percentage of total trading volume which actually gets transferred from one acco

Delta

Delta is one of the options greeks which is a measure of the sensitivity of the value (price) of an option for a unit change in the price of the underlying asset. In other words, delta can be expressed as a ratio of chan

Derivative

A derivative is a contract between two parties, which derives its value from an underlying asset. It gives certain rights and obligations to both the parties and has either linear or skewed payoffs. Underlying assets inc

Dickey Fuller Test

Dickey fuller test was developed by statisticians David Dickey and Wayne Fuller in 1979. In statistics, the Dickey-Fuller Test tests the null hypothesis of whether a unit root is present in an autoregressive model. The a

Direct Market Access (DMA)

Direct market Access (DMA) is an electronic facility which allows brokers to offer their clients direct access to the exchange trading system. This is facilitated through the broker’s infrastructure without any man

Dirty price

Dirty price is referred to the price of a bond including the accrued interest which is earned between the coupon payment dates. Dirty price is calculated by discounting the future cash flows of the bond including interes

Disclosed Quantity

An electronic order with a feature called disclosed quantity allows the trader to disclose only a part of the actual order quantity to the market. When one’s disclosed portion is filled, the next disclosed portion

Dispersion Trading

Dispersion trading is a kind of an index arbitrage strategy involving the selling of options on an index and buying a basket of options on the component stocks. The main idea behind dispersion trading is that the index i

Dividend

Dividend is the distribution of a company’s earnings/profits to its shareholders depending on the type (preferred stock, common stock) and the number of shares held by them. Dividend can be paid in the form of cash

Electronic Communication Network (ECN)

ECN is a computerized trading system that facilitates the trading of financial products on exchanges. An ECN connects buyer and seller over a network governed by protocols that eliminate the need for an intermediary such

Electronic Trading

Electronic trading also called as e-trading, is the process of trading securities, financial derivatives, and foreign exchange using an electronic platform, as opposed to the open outcry pits where trading used to take p

Equity

Equity can be defined as the difference between the value of the assets and the cost of the liabilities. Equity= Assets - Liabilities The above accounting equation represents that while starting a business, the

Equity Shares

Equity shares or ordinary shares are the types of shares wherein the holders have ownership rights and can control the functioning of the company through the voting rights that they possess. Equity shareholders enjoy the

Estimating volatility using Parkinson Estimator

We will discuss in detail the need for volatility estimation and how to estimate volatility using the Parkinson estimator. What is volatility? Volatility in financial assets is all about how much and how

European Option

A European option is an option that can be exercised only on the expiration date i.e the last day till which the option is valid. Generally, they are traded at a discount to their American counterpart since there i

Event Driven Backtest

In event driven backtesting, the automated trading strategy is connected to a real time market feed, often with a lag of few minutes. The trade executions are completed on the paper/simulator, but not on the real exchang

Exchange

The exchange is an open, organized marketplace where stocks, bonds, commodities, derivatives, and other financial instruments are traded at prices, discovered based on the demand and supply principle. In case of a stoc

Execution Risk

An execution of a trade is nothing but the completion of a ‘buy’ or a ‘sell’ order for a particular security. Execution risk in simple terms is the risk that the buy or sell order placed on the ex

Execution Strategy

Execution strategy is a trading strategy, which aims to reduce the market impact cost and in turn improve the performance of the strategy. They are mainly used to streamline the trading process. Execution strategies are

Expected Value

The expected value or EV implies an anticipated average value for investment at some time in the future. EV is used by investors to estimate how worthy a financial instrument is in comparison to the risk it bears when in

Exponential Moving Average

In exponential moving average, more weight is given to the current prices than to the historic prices. With the highest weight to the latest price, the weights reduce exponentially over the past prices. This gives the ex

Factor investing

Factor investing, an investment strategy that helps create a portfolio by selecting securities based on factors. Factors help in explaining the returns and risk of these securities. Macroeconomic and style are the two ty

Factor model

Factor model, a financial model which helps in constructing portfolios by employing multiple factors. When constructing a factor-based portfolio, factors should be chosen wisely. On comparing these factors, one can

Fat Finger Error

A fat-finger error is a slang term for a typing mistake. The term is widely used in finance industry. The term describes a typographical error caused by hitting the wrong key or by making a mistake during data inpu

Fed-day-effect

We will discuss Federal Open Market Committee (FOMC) Meeting Effect on Stocks. As a trader, you may have heard that the Fed has increased interest rates over the past year. This decision was made in an effort to counter

Fill-Or-Kill Order

An FOK order is an order to buy or sell a security that must be executed immediately in its entirety; otherwise, the entire order will be cancelled (i.e, no partial execution of the order is allowed).

Forecasting Implied Volatility using Machine Learning

In this article, we will discuss the concept of implied volatility and a methodology for forecasting IV values using machine learning. What is volatility? In finance, volatility is the degree of variation of a p

Forex

Forex, an acronym for foreign exchange is a decentralized market where trading of the world’s different currencies is done. Trading is done based on the exchange rate of the two currencies in consideration. Even th

Forwards

A forward contract is a contract between two parties who are obligated to buy or sell an asset at a specified price on a particular future date. In a forward contract, one party goes long (buys) the underlying asset from

Fundamental Analysis

Fundamental analysis is the examination of the factors that affect the well being of the economy, industry groups, and companies. The fundamental analysis determines the health and performance of an underlying company/st

Futures

A Future contract is a type of standardized derivative contract made between two parties through an organized exchange to buy or sell an underlying asset on a future date at an agreed-upon price. Both the parties engaged

FX Trading

Forex Trading is simply the trading of currencies from different countries against each other. It is one of the largest markets and considering the need to exchange currencies, it is also the most liquid market in the co

Gamma

Gamma is the measure of change of a portfolio’s delta with respect to the change in the price of the underlying asset; where delta is the change in the price of an option due to change in the price of the unde

GARCH

Developed in 1982 by Robert F. Engle, the generalized autoregressive conditional heteroskedasticity (GARCH) process is an econometric term developed to describe an approach to estimate volatility in financial markets. It

Good-Till-Cancelled Order

GTC is an order that remains valid until you manually cancel it or until the order is filled. GTC orders are generally set to expire in 30 to 90 days after the order is placed.

Granger Causality

Granger Causality is a method to check causality (i.e. cause and effect relationship) between two variables in a time series. It is a statistical hypothesis test of whether one time series is useful in predicting the oth

Hedge Funds

Hedge funds are a pool of funds, whose main aim is to generate returns that outperform the market returns. Hedge Funds take both long and short positions, buy and sell equities, initiate arbitrage, trade bonds, currencie

Hedging

Hedging is an investment strategy designed to offset a potential loss. In other words, hedging is investing to reduce the risk. Hedging against market price risk means to protect yourself from the adverse movements in pr

HFT

HFT is a special category of algorithmic trading characterized by holding period of securities ranging from microseconds to a few minutes. HFT requires powerful computers and excellent network architecture to t

High Price

High Price is the highest price at which stock traded over a specific period of time. Today’s high is the highest price at which stock traded during the course of the day.

High Volume Trading

High volume trading is when the total number of securities traded during a given period of time by a trader is very high. It is usually done by institutional investors like banks, insurance companies, mutual funds who po

Histogram

A histogram is a graphical representation in which all the data are grouped into user-specified ranges and presented in the form of bars. Mathematically, a histogram is a function that counts the number of observations t

Historical Price

Historical price is the past price of a stock, which can be used to forecast the stock’s future price. We can analyze the historical price of a stock to observe the patterns in the share prices and take buy or sell

How do you test the performance of an options trading strategy? You Backtest it!

In this article, we will see how to test an options trading strategy’s performance. Before we begin, one should note that options trading is risky and majority of traders lose money. Backtesting an options tra

Hypothesis Testing

Hypothesis testing implies a statistical method to test an assumption on a population parameter using sample data. It involves creating a null hypothesis which is the statement of the status quo. The alternate hypothesis

Hypothesis: Concept & Design

A Hypothesis, in general, is a statement which is capable of being tested by scientific methods. Ideally, a Hypothesis must be Clear and precise Capable of being tested and, should have some empirical referenc

Iceberg Order

Iceberg order is typically a larger order that is broken up into smaller orders to conceal the real size of order. When a large order enters the market it may affect the supply and demand in the market. To nullify such a

Illiquid

Illiquid refers to an asset or security that cannot quickly and easily be converted into cash without a loss in value. Few examples of illiquid securities can real estate, collectibles and thinly traded securities. Illiq

Immediate-Or-Cancel Order

An Immediate-Or-Cancel or IOC order is an order to buy or sell a security that must be executed immediately. In case entire order is not available at that moment, a partial fill is possible and the part of the order

Impact Cost

Impact cost is the cost a buyer or a seller incurs while executing a transaction. This cost is dependent on the existing market liquidity. In other words, it represents the cost of executing a transaction of a given secu

Implementation Shortfall

Implementation shortfall is the difference between the decision price or the price that prompts the trading decision with regard to that security and the final execution price, including commissions, taxes, and fees. It

Implied Volatility

Implied volatility is the expected future volatility of the stock. Implied volatility shows the stock’s potential movement, but it doesn’t forecast the direction of the move. If the implied volatility is high

In-The-Money Option

A call option is said to be in the money when the strike price is below the current trading price of the underlying asset. A put option is said to be in the money when the strike price is above the current price of the u

Index

An index is a statistical measure of change in the securities market. An index may track stocks, bonds, mutual funds or any other security, including other indices. The value of indices increases when the aggregate value

Index Arbitrage

An index arbitrage is a type of arbitrage strategy that attempts to take advantage of the discrepancies in price between a stock index and a futures contract on that index. Index arbitrage occurs when an arbitrageur take

Index Futures

Index Futures is a futures contract used to buy or sell a stock market index at a certain price on an agreed date in the future. Stock index futures are used for hedging, trading, investing and are also used as market se

Institutional Investors

Institutional Investment is a kind of investment done by an organization on behalf of its clients. Institutional investors pool together their funds and invest in a variety of financial instruments such as stocks, bonds,

Interest rate

An interest rate is a cost of borrowing money or different assets paid by a lender to a borrower. It is often expressed as an annual percentage of the principal. Interest rates are charged for loans, mortgages, credit ca

Interest Rate Swap

An interest rate swap is a type of swap agreement in which two parties agree to exchange interest rate cash flows, based on a specified notional amount. Interest rate swap can be used for both hedging and speculation. In

Intraday Trading

Intraday trading, also known as “day trading”, refers to opening a buy or a sell position and squaring it off on the same day. It involves speculating on the prices of securities based on quantitative, techni

Intrinsic Value of Option

Intrinsic value is used in options to indicate the amount by which the option is in the money. The intrinsic value of the in the money call option is determined by taking the difference

Investment bank

An investment bank is a financial intermediary whose main business is securities underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and acquisition (M&A

Iron Condor

The iron condor is a limited risk, limited reward option trading strategy. It can be visualized as a combination of a bull put spread and bear call spread. Sell 1 OTM Put Buy 1 OTM Put (Lower

Kelly criterion

Kelly criterion, mathematical technique relating to the long-term growth of capital which helps in managing money effectively. This system is also called the Kelly strategy, Kelly formula or Kelly bet. where: Kelly% =

kernel

A Kernel is a function that quantifies the similarity between two observations. It takes the data from a low dimensional feature space and maps it to a high dimensional space. This method is known as kernel trick.

Kurtosis

Kurtosis is the measurement of tailedness of a distribution. The tailedness in distribution occurs when there are outliers present. Hence, excess kurtosis implies the tailedness of the distribution which is relative to t

LASER

In the world of high-frequency trading where every second count, fibre-optic networks, and microwave networks may no longer be quick enough. Trading companies are now turning to high-speed laser networks between stock ex

Law of large numbers

Law of large numbers states that as the sample size grows, the resemblance between population parameters and sample characteristics becomes closer. In a financial context, the law of large numbers indicates that if the

Leverage

Leverage is the use of various financial instruments or borrowed capital to increase the potential return on investment. Leverage can also refer to the amount of debt used to finance assets. When one refers to something

LFT

Low-frequency trading (LFT) is characterized by trading that involves trades which are executed on an intraday or on a daily basis. The holding period of these securities generally ranges from a day to a few weeks. TBT

LIBOR

LIBOR is an acronym for London Inter-Bank Offer Rate. It is the benchmark at which banks lend funds to one another in the international interbank market for seven maturities ranging from overnights to 12 months which are

Limit Order

A limit order is an order to buy or sell a stock at a specific or better price. A buy limit order would only get executed at the limit price or lower, and a sell limit order would only get executed at the limit price or

Linear Regression

Linear Regression is one of the most widely known modeling techniques. Linear regression establishes a relationship between a dependent variable (Y) and one or more independent variables (X) using a best fit straight lin

Liquidity

Liquidity refers to the ability and ease with which assets can be converted into cash without affecting the current asset price in the market to a great extent. Market liquidity refers to the extent to which a market al

Liquidity Provider

Liquidity providers are trading members that act as a market makers by facilitating trading in securities and other financial instruments by providing a pool of shares so that buyers and sellers can trade easily. In othe

Lognormal Distribution

A random variable X is said to have a lognormal distribution if ln(X) has a normal distribution with mean μ and standard deviation σ. Equivalently, X = eY where Y is normally distributed with mean μ and stand

Long

A long or a long position is the buying of securities such as stocks, bonds, currency etc. If a trader is long a security then it means that the trader owns the security. An investor takes a long position, with the expec

Low Latency

Latency is the amount of time it takes for data to travel from its source to its destination. In simple terms, latency is defined as any delay or lapse of time between a request and a response. Low latency would mean tha

Low Price

Low Price is the lowest price at which stock traded over a specific period of time. Today’s low is the lowest price of a stock for today.

LTP

LTP stands for Last Traded Price. Last traded price is the price at which the seller and the buyer agreed to trade or exchange ownership of a particular security. The exchanges display these prices for every registered s

Machine Learning

Machine learning, as the name suggests is the ability of a machine to learn, even without programming it explicitly. It is a type of Artificial Intelligence which is based on algorithms to detect patterns in data and adj

Machine Readable News

Machine readable news is the news-data which is easy to read and process for a computer. News and social media data are available in huge volume but they are unstructured, therefore it becomes difficult to understa

Margin Trading

Margin Trading, also known as buying on margin is a mechanism of borrowing money from a broker to purchase stock. For margin trading, a trader needs to have a “margin account”, in which the broker lends the t

Market Capitalization

Market Capitalization refers to the total market value of company’s outstanding shares. It is one of the key parameters to determine the size of a company. It is calculated by multiplying the current market price o

Market Data Adapter

Market data adapter receives the market data from the different exchanges and converts it into a standardized format by using data normalizer. Data reflecting current trading information is used by traders to assess the

Market Making

Market making is aimed at infusing liquidity and it is mostly a market neutral trading strategy used for securities traded on Exchanges. The two most important features of market making are the bid-ask spread and trading

Market Microstructure

National Bureau of Economic Research (NBER) defines market microstructure as a field of study that is devoted to theoretical, empirical, and experimental research on the economics of securities market. Market microstruct

Market Order

In a Market Order, the broker or the trading destination is instructed by the trader or investor to buy or sell a stock immediately at the best prevailing price in the market. Market orders are therefore used when the ce

Market Return

Market return is the return on the market portfolio. Market portfolio includes all assets in proportion to their market value in the corresponding index. In short, the market returns could also mean the corresponding ben

Market Risk

Market risk, also known as systematic risk, is a possibility that a trader or investor can incur losses due to factors that are not under his control. These risks are common to each and every investor who invests in the

Market wide OI limit

A market-wide open interest limit is the maximum number of open positions allowed across the F&O contracts of the stock. The market-wide open interest limit is calculated by summing the open positions in the derivati

Maximum Drawdown

Maximum Drawdown is one of the key measures to assess the risk in a portfolio. In your trading or investment period, your portfolio reduces in value multiple times. These reductions in value are known as drawdowns. The m

Mean

The mean is one of the measures of central tendency. Mean implies the average of a dataset consisting of values. Mean makes sure that there is an equal distribution of values in a given dataset. Also, mean carries the sy

Mean Reversion

Mean Reversion theory suggests that considerable deviations in security prices tend to return to their historical mean. In other words, if the price moves too far away from its long term average, it will revert back

Median

In statistics and probability theory, the median is the value that separates the higher half from the lower half of a data sample. In a data set of values that are sorted, the median can be a middle value. The basic fe

MFT

Medium frequency trading is usually characterized by the holding period of securities which usually range from a few minutes to an entire day. In medium frequency trading, we use OHLC data with varying frequencies along

Microwave Frequency

Microwaves are a form of electromagnetic radiation with wavelengths ranging from 1 millimetre to 1 meter with a frequency between 300 MHz to 300 GHz. In the world of high-frequency trading, where a few milliseconds can

Mid Price

The mid price is the average of best ask price and best bid price

Millisecond Frequency Trading

We will discuss how you can gain an edge over other traders in terms of speed without investing in expensive infrastructure, by engaging in millisecond frequency trading. Frequency, or rather, trading frequency i

Mode

Mode is the number that occurs most often within a given set of numbers. It is a way of expressing an important value among the other numbers of the series. Consider the set of numbers below: 3, 2, 8, 8, 16, 16

Momentum

Momentum is a tendency due to which a security has a tendency to continue its price movement in the given direction. For example; if a security is in demand, it will stimulate buying and the price of the security begins

Momentum Crash

Momentum is the tendency of a security to continue its movement in a particular direction. Momentum crash is basically the sudden reversal of a prevailing trend in the market. In April 2011, Kent Daniel published the re

Momentum Trading

Momentum strategies seek to take profit from those securities which are trending and backed by high volume. In simple words, buy high and sell higher is the mantra for this strategy. This can be achieved by taking positi

Monte Carlo Simulation

Monte Carlo Simulation is a method to understand the impact of risk on the return by generating many price scenarios (usually thousands) to value the assets in a portfolio over a range of possible market conditions. In g

Moving Average

Moving Average also called Rolling average, is simply the mean or average of the specified data field for a given set of consecutive periods. As new data becomes available, the mean of the data is computed by dropp

Moving Average Crossover

Moving average crossover is a common technical indicator used by many traders. This technique uses Moving Averages of different window lengths (time periods). Crossover occurs when a short-term Simple Moving Average cros

News Based Trading

News is one of the prime factors that affect the prices, volume, and volatility of financial assets in the market. In news based trading, traders try to take advantage of the temporary mispricing of a security in t

Normal Distribution

A normal distribution looks like a bell-shaped curve. It is a symmetric distribution with two parameters: mean and standard deviation. You can see the visual representation of Normal Distribution in the chart bel

Null Hypothesis

A null hypothesis is an assumption of the status quo. It assumes that there is no statistically significant difference in the observed value of a parameter and its mean and any such difference that arises is by chance on

One-Cancels-The-Other Order

An OCO order sets two orders of the same quantity for the same contract at different price levels. These orders are automatically linked together, meaning if one of the order gets executed, the other order auto

Open Interest

An open interest is a total number of contracts outstanding (yet to be settled) for an underlying asset. In other words, it is the total number of contracts that have not yet been exercised (squared off), expired, or ful

Opening Price

Opening price is the price of a security at the beginning of the trading day. It is a good indicator for people interested in making short-time trades, as a security’s opening price can help determining the day&rsq

Operational Risk

Operational risk (OR) is the risk that a trading house faces due to a failed internal process or system/network flaw. OR involves a wide range of “non- financial problems” such as: Technolog

Optical Fiber

Optical fiber refers to the technology of transmission of data using fiber. This is a flexible, transparent fiber which is usually made of glass or plastic. Optical fiber carries more information over longer distances an

Option

An option is a financial derivative that specifies a contract between two parties that gives the buyer (of the option) the right but not the obligation to buy/sell an underlying asset at a pre-decided price (strike price

Option Expiry

Option expiry or option expiry date is the last date on which the holder of an option may exercise it, according to the pre-decided terms. Mostly, exchange-traded options contracts expire according to a predetermined cal

Option Greeks

Option Greeks are the “Greek Letters” where each letter measures a different dimension of the risk in an option position. Option Greeks allow an options trader to calculate changes in the value of the option

Option Payoff

An option payoff diagram is a graphical representation of the net Profit/Loss made by the option buyers and sellers. where, S = Underlying Price X = Strike Price Before we begin with the explanation, it is

Option Premium

Option Premium is the upfront payment made by the option buyer to the option seller to acquire the option. Premium is paid by the option buyer, as the cost of the right that he receives after purchasing an option. It is

Option Spreads

Option Spreads are trading strategies which involve taking positions by buying and selling an equal number of options of the same class, on the same underlying security but with different strike price and expiration date

Order

An order is an instruction by an investor to a broker or a brokerage firm or directly at the trading venue to buy or sell securities like stocks, bonds or derivatives. Orders can be placed over the phone or onl

Order Book

An order book is an electronic list of buy or sell orders of securities organised as per price levels and time priorities. This means that a person having a higher price on the buy side or lower price on the sell side wi

Order Flow

In stock trading, it is a common practice among brokerage firms to route orders to be executed to different parties. The brokerage firm receives a small amount usually a penny per share for directing the order

Order Matching

Order matching in most exchanges is done on the basis of price-time priority. When a new order is placed in the exchange, best buy order (highest price) is matched with the best sell order (lowest price). Price level mat

Order Routing

Order routing is a process by which an order goes from the end user to an exchange. An order may go directly to the exchange from the customer, or it may go first to a broker, who then routes the order to the exchange. O

Order Size

Order Size is the number of shares of a particular security that a trader buys or sells in one transaction.

Order to Trade Ratio

Order to trade ratio is the ratio of total volume of all posted orders to the number of orders filled. A ratio of 50% would indicate that only half of the total orders got filled and the rest remained pending or got canc

Orders Per Second

Order per second is the number of orders sent or posted by traders in one second to be filled in the market.

Oscillators

Oscillator is a tool used in technical analysis, which varies within a band/ range, over a period of time. It is used to identify price direction of a stock and is used along with price charts. Oscillators are useful in

OTC (Over-The-Counter)

The OTC is a market where financial instruments such as currencies, stocks, commodities, bonds etc are traded directly between two parties as opposed to a centralized exchange (such as the NYSE, CME, LME, NSE,

Out-Of-The-Money Option

A call option is said to be out of the money when the strike price is above the current price of the underlying asset. While for a put option, the same can be said when the strike price is below the market price of the a

Outstanding Shares

Outstanding shares refers to the number of shares that are issued by a corporation and currently held by investors. They have certain rights and represent ownership of the corporation to the person who holds the shares.

Overbought

Overbought is a term that refers to a situation of very high demand for a security or an asset, which results in an increase in the price of the asset to levels that cannot be justified by its fundamentals. Generally, in

Overfitting

In both machine learning and statistics, overfitting occurs when the model fits the data too well or simply put, when the model is too complex. Overfitting model learns the detail and noise in the training data to such a

Oversold

Oversold refers to a situation when the price of a security or an underlying asset falls sharply below its justifiable or true value (ie undervalued). This usually occurs as a result of market overreaction or panic selli

P-value

P-value or calculated probability is the value of probability of an event occurrence if a null hypothesis turns out to be true. It can also be interpreted the other way round, in the sense that p-value helps to determine

Pairs Trading

Pairs trading is a market neutral strategy, where a pair or a basket of stocks are selected and long position is taken on one leg and a short position on the another. The strategy builds on mean reversion theory, which

Pension funds

Pension funds may be defined as a form of institutional investment like mutual funds and hedge funds, which pools and invests funds contributed by investors to provide for their future pension income. They provide means

Permutations and Combinations

Permutation implies arranging all the members of a set into a sequence or order. In other words, if the set is already ordered, then the rearranging of its elements is called the process of permutation. For instance, pla

Population

A population is a complete set of all possible observations under investigation. If a population contains a finite number of units then it is a finite population. Correspondingly, if it contains an infinite number of uni

Population Mean

Population mean represents the actual mean of the whole population. It is denoted by μ. Formula for population mean is where, Σx is the sum of all the individual items in the population, N is the number of

Population Standard Deviation

Population standard deviation is the amount of variation of the set of values in a population from the population mean. The formula for population standard deviation is: Where, = population standard d

Portfolio

Portfolio is a collection of financial instruments such as stocks, bonds, cash equivalents, funds held by an individual, investment company or financial institution. An investment portfolio can be regarded as a pie which

Portfolio optimization

Portfolio optimization is the process of constructing portfolios to maximize expected return while minimizing the risk. It involves analyzing portfolios with different proportions of investments by calculating the risk a

Preferred Stock

Preferred stock represents a different segment of ownership which has a greater claim on the company’s assets than common stockholders, but they do not enjoy any voting rights. They also have priority over common s

Prime Broker

Prime brokers are large institutions that provide a bundle of services to hedge funds and other large financial institutions. Prime brokerage offers a large variety of services which include securities clearing facility,

Probability distribution function

In probability theory, a probability distribution is a statistical function that describes all the possible values and likelihoods that a random variable can take within a given range. Generally, we denote the random var

Proprietary Trading

Proprietary trading occurs when a bank or some other financial institution trades with the firm’s own funds rather than trading on behalf of its clients, to earn profits for itself. Firms or financial institutions

Proximity Hosting

Trading firms who choose not to place their servers in an exchange’s data center can do so in a data center operated by a third party which is usually very close to the exchange’s data center. This is called

Put Option

Put option is a derivative instrument which gives the buyer of the option (holder) the right but not the obligation to sell the underlying asset at a fixed price (exercise or strike price) after a specified period of tim

Quantiles

In statistics, quantiles are points that divide the range of a probability distribution into continuous intervals that have equal probabilities. The common quantiles are: Quartiles (four equal portions

Quantitative Finance

Quantitative Finance, also known as Mathematical Finance, is a field of applied mathematics that primarily deals with financial markets. Quantitative finance possesses a close relationship with financial economics and co

Quantitative Trading

Quantitative trading involves the use of trading strategies based on quantitative analysis, mathematical computations, and statistical techniques to identify trading opportunities in the market. Quantitative traders take

Quants

A quantitative analyst or a quant is a person who specializes in the application of mathematical and statistical methods to understand and predict the behavior of the financial markets. Quantitative analysts aim to repre

Random Sampling

In random sampling, each member of a population has an equal chance or probability of getting selected. This process is an unbiased representation of the total population in which each subject is selected independently

Random Variable

A variable whose value is unknown and can be numerically expressed as the result of a statistical experiment. There are two types of random variables: Discrete Random Variable A discrete random variable c

Random Walk

Assuming that the markets are completely efficient, random walk theory states that stock prices change in a random manner and one cannot predict the price of a stock in advance. The theory argues that each change is inde

Realized Volatility

Realized volatility refers to the measure of daily changes in the price of a security over a particular period of time. It assumes the daily mean price to be zero in order to provide movement regardless of direction. &nb

Regression

A regression implies the statistical relation of the dependent variable to one or more independent variables. The regression model shows whether the changes in the dependent variable are associated with the changes in on

Reinforcement Learning

In this article, we will discuss about Reinforcement Learning and how it can be used to design trading strategies. What is Reinforcement Learning? Reinforcement Learning is a fascinating concept that revo

Relative Strength Index (RSI)

Relative strength index is a momentum oscillator to indicate overbought and oversold conditions in the market. It oscillates between 0 and 100 and its values below a certain value, usually, 30 indicate an oversold market

Replace order

Replace order involves taking over an order by another order. Replace order is followed after the order which was placed, but not executed, is cancelled. Hence, an order not executed is first cancelled and then is replac

Research Backtest

Research Backtesting is the initial phase of backtesting a strategy, where in all aspects of market interaction are not fully simulated, but approximations are made to determine the potential strategy’s performance

Retail Trading

Retail trading involves trading done by individual investors who buy or sell securities for their personal account. Retail investors buy in smaller quantities as compared to institutional investors and hence cannot alter

Returns

A return is a profit or a loss on an investment during a particular time period. If investment results in a profit, it is said to bear a positive return while if it results in a loss, it is described as a negative return

Rho

Rho is one of the option greeks, which measures the sensitivity of the price of an option with respect to the change in the interest rate. Rho is denoted by the greek letter and is calculated as: Rho = Ch

Risk Free Rate

The risk-free rate of return is a theoretical rate of return on an investment with no risk over a given period of time. In practice, risk-free rate does not exist because even the safest investments carry some amount of

Risk Management System

Risk management is the identification, assessment, and mitigation of risks. This will be followed by a coordinated and an economical application of resources to minimize the impact of unfortunate events or to maximize th

Risk parity

Risk Parity, a portfolio allocation strategy balances the overall risk of the portfolio. This approach allocates risk equally to all securities in the portfolio. This strategy allocates less capital to high-risk securiti

Sample

A sample is a portion chosen from the population. If a sample consists of the whole population then it is called census. The number of units in a sample is called sample unit. It is practically impossible to enumerate t

Sample Mean

Sample mean is the mean of the random sample values drawn from a population. It is denoted by x?. Consider n independent random variables X1, X2, . . . Xn, each corresponding to a randomly selected observation. The

Sample Standard Deviation

In statistics, we are usually presented with a sample from which we wish to generalize a population. The standard deviation of a sample is denoted by s and is calculated by using the formula: Where, s = sample standa

Scalping

Scalping is a trading strategy in which traders hold a position for a very short period of time to take small profits. Traders who implement this strategy are known as scalpers. They hope to reap a small profit on each t

Security

A security is a financial instrument that represents some kind of monetary value and can be traded. The company or other entity issuing the security is called the issuer. Securities are generally listed on exchanges, but

Sell Order

Sell order is an instruction given by an investor to a broker in order to sell a security.

Sentiment Analysis

Sentiment analysis is the analysis to gauge the market attitude or generic emotions towards a particular security, using the news reports, blog posts, twitter messages etc. This process usually involves the usage of natu

Sentiment Trading

Sentiments can often drive the direction of the markets. Traders can gauge the sentiment expressed in news blogs, tweets, and macroeconomic reports. Based on this information they take positions in the market. These posi

Server

A server is a computer program that provides services to other computer programs in the same or a different computer. Servers can provide various functionalities, often called services, such as sharing data or resources

Sharpe Ratio

The Sharpe ratio measures the excess return per unit of standard deviation in an investment asset or a trading strategy. Higher the Sharpe ratio, the more return the investor is getting per unit of risk. The lower the Sh

Short

Short or Short selling is the practice of selling securities that are not currently owned by investors in the hope that they will decline in value. Selling short is the opposite of going long. Short-selling is a strategy

Short Interest

Short interest is the number of stock shares that have been sold short but not repurchased. It is basically expressed as a percentage of the total securities outstanding. For example, if a company XYZ has sold short 5 mi

Significance level

Significance level is used to calculate the critical value which is compared with a p-value in order to reject/accept the null hypothesis. It is denoted by α and is a probability threshold below which the null hypo

Simple Moving Average

A simple moving average (SMA) is the average price of a security over a specific period of time. Most moving averages are based on closing price. A 5-day simple moving average is the sum of closing prices of five days di

Six Sigma Event

Any event that is extremely rare, beyond the sixth standard deviation in a normal distribution, is known as a six sigma event. The probability of such an event happening would be about [2* 10^(-9)] or twice in a billion.

Skewness

Skewness is a part of probability theory. To put it in simple words, skewness is a measure of the asymmetry of the probability distribution. Skewness is visually represented by the curve leaning towards one of the sides

Slippage

Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage is more during the periods of higher volatility. A sample order book Suppos

Snapshot Data

In snapshot data, the exchange shares the snapshot of the top “N” best buyers and sellers few times in every second. Snapshot Data feed contains data pertaining to Stock Exchange trade quotations and other re

Sortino Ratio

The Sortino ratio is similar to Sharpe ratio, except Sharpe ratio involves both the upward and the downward volatility while Sortino ratio represents only downward volatility. Just like Sharpe ratio, higher the Sortino

Spot Price

Spot price is the current market price of a particular commodity/security at which it can be bought or sold for immediate payment. The spot price is commonly used for pricing future contracts and to make projections abou

Spread

In finance, the spread can be defined as the difference between any two prices. It is also defined as the difference between the current bid and current ask prices for a given security (bid-ask spread). In the context of

Spread Trading

Spread trading is the simultaneous buying and selling of related securities, that act as one unit. Each of the individual trades is known as a leg. Investors usually try to make profit from the difference between these l

Standard Deviation

A standard deviation is basically a static tool to measure the dispersion of the dataset values from the mean. Mean is the average of two or more numbers in the dataset. The standard deviation is calculated as th

Standard Normal Distribution

Standard normal distribution is a normal distribution with mean equal to 0 and standard deviation of 1. The general formula for the probability density function of the normal distribution is - Where

Stationarity

A stationary time series is one whose statistical properties such as mean, variance, etc. do not change over time. Most statistical forecasting methods are based on the assumption that time series is stationary. But most

Statistical Arbitrage

Statistical Arbitrage or Stat Arb is a trading strategy based on the statistical mispricing of one or more assets compared to the expected future value of the assets. Stat Arb algorithms monitor financial instruments tha

Statistics

Statistics is the branch of mathematics that deals with the collection, classification, analysis and interpretation of numerical data, by using mathematical theories of probability. Statistics can interpret large data th

Stochastic Process

A stochastic process is a collection of random variables defined on a common probability space, taking values from the same mathematical space known as the state space and indexed by some mathematical set usually N or [0

Stock Market Crash

A sudden decline in the prices of a significant number of stocks of the stock exchange is termed as a stock market crash. This undesirable event happens due to public panic, economic factors or the collapse of a lo

Stocks

A stock is a type of security used to signify ownership in a corporation. Stocks are generally bought and sold on an exchange. Stocks are of two types: common stock and preferred stock. The holder of the common stocks is

Stop Limit Order

An investor can avoid the risk of an order executing at an unexpected price by placing a stop limit order. A stop limit order combines the feature of both stop and limit order. Once the stop price is reached, a stop limi

Stop Loss

Stop loss is a buy or sell order which gets triggered when the stock price reaches a specified price known as the stop price. Stop loss is extremely useful for the investor who doesn’t want to monitor the security

Stop Order

A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. The stop price is not the guaranteed execution price for a stop order. The stop price is a t

Straddle

Straddle is an options trading strategy in which the investor holds a position in both a call and a put with the same underlying price having the same strike price and expiration date. A straddle is used when we expect

Strangle

Like Straddle, Strangle also pays on volatility. In strangle, the investor holds a position in both call and put with different strike price but with the same maturity and underlying. This is generally less expensive tha

Strike Price

The strike price is the specific price at which a derivative contract can be exercised. Strike prices are fixed for options contracts through the life of the contract. For call options, the strike price is the price at w

Student T-Distribution

The t-distribution is a normal distribution used to determine population parameters when the sample size is small and population variance is unknown. A t-distribution curve has a lower height and wider spread than standa

Support Vector Machine

A support vector machine, or an SVM, is a machine learning technique widely used in the fields of data analysis and pattern recognition. Classifying data has been one of the major tasks in machine learning problems. The

Swap

Swaps are agreements to exchange one financial contract for another on the specified future date, as specified in the contract. Swaps are traded over the counter. Swaps can be used for hedging which includes interest rat

Swaption

Swaption is a type of an option that gives the buyer the right but not the obligation to enter into a swap contract on a specified future date. Swaptions are over the counter contracts, i.e. not traded on an exchange. T

T-Statistics

A t-statistic or test statistic is a standardized value that is calculated from sample data during a hypothesis test. Test statistics can be used to determine whether to reject or accept a null hypothesis. The distributi

Take Profit

Take profit orders are used to lock in a targeted profit on a long and short position. The profit price can be expressed in terms of absolute price or as a percentage from the buying price or the current price of assets

TBT Data

In tick-by-tick (TBT) data, the exchange provides data for every tick received by the exchange from various market participants. Most of the exchanges provide snapshot as well as TBT data. Tick by Tick data inclu

Technical Analysis

Technical analysis is a study of forecasting price of financial securities by analysing the historical market data. Technical analysis employs models and trading rules based on price and volume, such as the relative stre

Theta

Theta is one of the options greeks which measures an option’s sensitivity to the time till expiration of the option. It is the change in the value of an option with respect to the passage of time, with everything e

Tick

Tick is a measure of minimum upward or downward movement in the price of a security. A tick can also refer to the change in the price of security from trade to trade. If a trade is at higher price than its last traded p

Tick Database

Tick databases are real-time database servers which are used for storing, managing, processing, and analyzing tick data purchased from multiple data sources. A database must be able to do the following:

Time Series

A time series is a sequence of observations indexed over time. In trading, time series forms an important part as it is used to track down the prices of a security over a period of time. Example: Movement of a s

Time Series Analysis

Time series analysis is analyzing a time series data to understand its characteristics, design and framework in order to draw inferences from it. Time series analysis has many applications which include yield projections

Time Series Forecasting

Time series forecasting is the use of a model to predict the future values of a time-based data series, using previously observed values. Time series forecasting is applied in predicting values such as stock performance,

Time Value of Option

An option’s time value is equal to the option’s premium minus its intrinsic value. The concept of time value of an option is based on the rationale that an option buyer should pay more than its intrinsic valu

Trade Price

Trade price is the price at which the security is traded (i.e., purchased or sold) at any given time. This price is the one which is updated online every minute. In order to derive an optimal trade price, both buy

Traded Volume

Traded Volume is the total number of shares or contracts traded for a security during a specific period of time. While average volume is the volume traded per unit of time. Higher the volume of a stock higher will be its

Trading based on News Headlines using NLP

What is NLP? Natural Language Processing (NLP), is a branch of artificial intelligence that deals with the interaction between computers and human languages. It involves analysing and processing natural l

Trading during earnings releases

We will discuss an important strategy that day traders can deploy. The strategy is Post Earnings Announcement Drift (PEAD). The results of applying this strategy on Apple stock from May 2018 to October 2019 is shown belo

Trading Frequency

Trading Frequency is basically the number of trades executed in a specific time interval. In high-frequency trading, the holding period is generally very short in the range of milliseconds or 10^-3 seconds to few minutes

Trading Strategy

A trading strategy is a set of rules that traders use when making trading decisions. When properly researched and executed a trading strategy helps traders in achieving high returns. When the strategy execution is fully

Transaction Cost

Transaction cost is a cost incurred in making an economic exchange or buying/selling of a security. Transaction costs can be divided into three components which are: search and information costs bargaining and

Transaction Cost Analysis

Transaction cost analysis (TCA) is the study of trade prices to determine whether the trades were arranged at a favourable price - low prices for purchases and high prices for sales. Transaction cost analysis can be div

Trend

Trend is the general direction or momentum of the market, price of an asset, economy or other measures. Trends are classified as secular if they last for 5 to 25 years. Trend is called primary when they last for a year o

Trend Following

Trading the trend is a strategy, which tries to take advantage of a trend already established in the market. Traders who employ a trend following strategy do not aim to forecast any specific price levels. Such traders no

TWAP

Time-weighted average price is defined as the average price of a security over a specific period of time. Intuitively, TWAP is calculated by first averaging the open, high, low, and close prices for each day. Then as tim

Unsupervised Learning

Unsupervised learning is a type of machine learning in which only the input data is provided and the output data (labelling) is absent. Algorithms in unsupervised learning are left on their own without any assistance, to

Unsystematic Risk

Unsystematic risk also known as specific risk, diversifiable risk or residual risk, is the risk which is specific to a particular industry, sector or company. This type of risk is avoidable or controllable by its bearer.

Value At Risk (VaR)

VaR is a measure of market risk. It is the measure of maximum loss that can occur with certain confidence interval over a given period of time. Using VaR, financial institutions can determine the sufficient capital reser

Vanna

Vanna is a second order derivative which measures the movements of the delta with respect to changes in implied volatility. Vanna is also rate of change of vega with respect to changes in the underlying price. Vanna is u

Variance

The variance, in a data set, measures how far each number in the set is from the mean. The symbol of variance is σ2 and is used by the quantitative analysts in order to determine volatility and market security. &nb

Vega

Vega is the measure of the sensitivity of the price of an option to the change in implied volatility of the underlying asset. It can be calculated as follows: Vega = Change in an option price/ Change in vol

Volatility

The upward and downward movement of a security over a period is called volatility. Volatility measures the risk of the security. In general, higher the volatility, riskier the security. If the price of a security fluctua

Volatility Arbitrage

Volatility arbitrage is a type of statistical arbitrage that seeks to take advantage of the difference between the implied volatility of an option and the volatility of the underlying asset. This strategy is generally im

Volatility Skew

Implied volatility decreases as the strike price increases, implying that implied volatility is different for in-the-money, out-of-the-money and at-the-money options. Volatility skew shows that implied volatility is high

Volatility Smile

Volatility smile is an U or smile shaped curve obtained when implied volatility is plotted against different strike prices options with the same expiration date. According to Black-Scholes model, implied volatil

Volatility Surface

Implied volatility is the function of both strike price and expiration time. For a given strike price, options with shorter time to maturity has higher implied volatility than options with longer maturities. Volatility S

Volga or Vomma

Volga or Vomma or Volatility Gamma is an option greek, a second-order derivative indicating the change in vega with respect to change in volatility. Volga is positive for options which are not in-the-money and g

VWAP

Volume Weighted Average Price (VWAP) is an execution strategy usually used in intraday trading. VWAP is the average of all trades weighted by their volumes. It gives an indication of how the price has moved over a period

Weighted Average

Weighted Average, or weighted mean, is a mean resulting from the multiplication of each component with a predefined weight, reflecting its importance. Weighted average is usually prefered over simple average when the com

Weighted Moving Average

A weighted moving average is calculated in the same manner as a simple moving average, but uses values that are linearly weighted to ensure that the most recent values have a greater impact on the average. Weights in a w

Yield

The income earned in a particular time period from an investment is usually expressed as a percentage of money invested, this is called the yield. A given investment can have a variety of yields because of the many metho

Z- Test

A Z-test is a hypothesis test based on the Z-statistic, which follows the standard normal distribution under the null hypothesis. Z-test is used if Sample size is greater than 30. Data points are i

z-score

Z-score of a number is its distance from the mean in the multiples of standard deviation. Applications: Z-score can be used to determine if an observation has strayed too far from its mean. The bigger the absolute value

Zero Coupon Bonds

Zero coupon bond is a type of bond which do not make the period coupon payments. This bond is sold at a discount, that is, it can be bought at a price lower than its face value with face value to be paid at t

52 week high/low

52 week high/low is the highest/lowest price that a stock has traded at in the past 52 weeks. It is an important parameter for investors as while making investment decisions they compare the current trading price of the