Real-time Market Data
As you may have noted that your ATS will need live data to punch orders immediately when your pre-set conditions are met. If your broker is providing an exchange approved ATS, they will provide live data through TAP server.
Historical backfill data: for most algos, some historical data is also required; say data since market open, data for a week or data for a month. This data is provided in time stamps of 1-minute, 5-minute or so on.
To analyze the performance/stability of a strategy, you may need to test the strategy on several years of historical data. Such backtest data will need to be normalized for future contract rollovers, dividends, bonuses or splits. Backtesting database is provided by stock market data vendors and personally maintained by professional traders
Trading Logic, or Alpha Strategy
This is the “Soul” or most important part of ATS which contains set of conditions when to Buy or Sell. If this logic is good enough, you will make profits in trading or it may also bring you loss. An example is Buying when stock prices rise above previous day’s high and selling when stock prices fall below previous day’s sell. This logic should be programmed in your ATS Software as a module.
As already mentioned in preceding FAQs, Risk Management is essential part of entire algo trading. Even if the position initiating logic is not implemented, the position exit logic should be executed to exit a trade. This inherently implements a risk management system- because your max loss limit is defined.
Basic costs are brokerage, software costs, exchange fees and taxes. Professionals who trade significant turnover also face slippage costs and impact costs.
Once decided the when to buy/sell, the remainingpart will be how to buy/sell. Your ATS may trade using limit orders, market orders or advanced logic of auto-modification of limit order. IT could get as complex as placing multi-leg, auto-modifying, multi-client, multi-scrip and multi-exchange order. The Execution Strategy tries to get the best prices at least possible time by modifying, slicing or canceling the limit orders as fast as possible.
Is there an Exchange Approval required before running an ATS
Yes- for the brokers, No- for the clients. Any ATS system such as Bracket Order or Trade Tiger should be pre-approved by broker. Auditors from the exchange test the system/strategy for a checklist to before giving necessary approvals. The check-list is exhaustive but the approval process may be fast if the broker is competent. Apart from initial approval, brokers are mandated to run their ATS in mock trading sessions and regular auditing is conducted by the respective exchanges.