You're reading from Learn Algorithmic Trading

Product typeBook

Published inNov 2019

Reading LevelIntermediate

PublisherPackt

ISBN-139781789348347

Edition1st Edition

Languages

Python

Concepts

Financial Technology

Authors (2):

Sebastien Donadio

Sourav Ghosh

View More author details

Connecting to Trading Exchanges

At this point, we have a good understanding of how to write a trading system and writing the code for all the critical components. We went into detail about book building, creating trading signals, and getting a market response.

In this chapter, we will introduce the component that's in charge of communicating with the outside world and the gateway. We will look at the different functionalities of this component and describe the different types of protocols that we will encounter. Finally, we will implement a gateway that will connect to a real liquidity provider.

In this chapter, we will cover the following topics:

Making a trading system trade with exchanges
Reviewing the Communication API
Receiving price updates
Sending orders and receiving market responses

Making a trading system trade with exchanges

As we saw in Chapter 7, Building a Trading System in Python, a trading system is a piece of software that is capable of collecting financial data and sending orders to the market. This trading system has many functional components that are in charge of handling trading and risks, as well as monitoring the trading process that happens on one or many exchanges. When you code a trading strategy, it will become a component of the trading system. You will need input price information and your trading strategy as output. This will send trading indications. To complete this flow, we require gateways since they are the main components.

The following diagram shows the functional components of a trading system, the gateway's interface, and the outside world with the trading system. The gateways collect prices and market responses...

Reviewing the Communication API

Network protocols define the rules of communication between machines. They define how these machines will be recognized on the network and how they will interact. In trading finance, we use the UDP and TCP over the IP protocol. Additionally, we use a software protocol that will define how to communicate with an order and get a price update. The Communication API will set the rules of communication at the software level. The Communication API is given by the entity that you would like to trade with. This document contains all the messages that you will use to receive prices and send orders.

You can find examples of trading API documents at https://en.wikipedia.org/wiki/List_of_electronic_trading_protocols.

Before diving into the trading API, we will need to explain the basics of networking.

...

Receiving price updates

When we implement an FIX parser and an FIX composer, we know how tedious and time-consuming this process is. If you choose to implement these parts from scratch, you will need to take care of the network connections, the parsing operations, and the part creating the FIX messages. Because we want to focus on creating a trading system that's capable of working quickly, we will want to use a library where all the functions have already been implemented. There are many commercial FIX libraries available, including NYFIX, Aegisfot – Aethna, Reuters – Traid, and Financial Fusion – Trade Force. The one we will use is called the quickfix library.

This library can be downloaded from http://www.quickfixengine.org/.

This library was created in 2000 and is supported by Java, C++, and Python.

The libraries simplify the developer...

Sending orders and receiving a market response

The main goal of a trading system is to send orders and receive market responses regarding these orders. In this section, we will cover how to send an order and how to get an update on these orders.

The role of the initiator is to initiate a connection with the acceptor. When the connection is established, the trading session is enabled. From this very moment, the trading system can send orders to the exchange. The order will have the following type of message:

8=FIX.4.4|9=155|35=D|11=3440|15=USD|21=2|38=20000|40=D|44=55.945|54=1|55=USD/RUB|59=3|60=20190909-19:35:27|64=SP|107=SPOT|117=b3fc02d3-373e-4632-80a0-e50c2119310e|167=FOR|10=150|

The initiator creates the orders by using the message type 35=D (representing a single order). All the fields of these orders will be filled in by the function of the quickfix library. Let...

Summary

In this chapter, we learned that trading system communication is key to trading. The trading system is in charge of collecting the required prices to make an informed decision. If this component is slow, it will make the trading decision slower. Gateways are technically more challenging than any of the other components because they need to deal with the communication. The communication implies that layers are handled perfectly on the computer level; that is, the computer architecture (network layer), operating system (system calls, the driver that talks to the network card, and so on), and the software itself. All of these layers must be optimized so that they have a fast trading system. Because of their level of technical complexity, it is unlikely that you will implement this communication if you have strategies for high-frequency trading. Instead, you will use a system...

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Authors (2)

Sebastien Donadio

Sebastien Donadio is the Chief Technology Officer at Tradair, responsible for leading the technology. He has a wide variety of professional experience, including being head of software engineering at HC Technologies, partner and technical director of a high-frequency FX firm, a quantitative trading strategy software developer at Sun Trading, working as project lead for the Department of Defense. He also has research experience with Bull SAS, and an IT Credit Risk Manager with Socit Gnrale while in France. He has taught various computer science courses for the past ten years in the University of Chicago, NYU and Columbia University. His main passion is technology but he is also a scuba diving instructor and an experienced rock-climber.
Read more about Sebastien Donadio

Sourav Ghosh

Sourav Ghosh has worked in several proprietary, high-frequency algorithmic trading firms over the last decade. He has built and deployed extremely low latency, high-throughput automated trading systems for trading exchanges around the world, across multiple asset classes. He specializes in statistical arbitrage market-making and pairs trading strategies with the most liquid global futures contracts. He is currently the vice president at an investment bank based in São Paulo, Brazil. He holds a master's in computer science from the University of Southern California. His areas of interest include computer architecture, FinTech, probability theory and stochastic processes, statistical learning and inference methods, and natural language processing.
Read more about Sourav Ghosh

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