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Algorithmic Trading System

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 Algorithmic Trading System
Yasmeen Attar Sunil Pawar Himalaya Patil
A.C Patil College of Engineering, A.C Patil College of Engineering, A.C Patil College of Engineering,
Navi Mumbai, India Navi Mumbai, India Navi Mumbai, India
[email protected] [email protected] [email protected]

Kiran Danake Suraj Dhanke

A.C Patil College of Engineering, A.C Patil College of Engineering,
Navi Mumbai, India Navi Mumbai, India
[email protected] [email protected]

Abstract - When it comes to electronic financial markets, constantly changing to accommodate the financial markets'
algorithmic trading refers to the use of computer constant change. Automated systems that can process large
programs to automate steps in the trading process datasets in real-time are becoming more and more necessary
including data analysis before a trade, trade execution, as global financial transactions pick up speed. In this
and the creation of trading signals. Trade execution is situation, algorithmic trading acts as a catalyst for efficiency,
further separated into agency/broker execution (where a giving traders the capacity to react to market dynamics
system optimizes the execution of a trade on behalf of a quickly and strategically.
customer) and principal/proprietary trading (when an
institution trades on its own account). This trading Fundamentally, algorithmic trading is based on automating
process can be operated by humans and algorithms at decision-making procedures in order to eliminate delays
every level, by humans and algorithms, or by humans and caused by humans. Trades that are completed in milliseconds,
algorithms totally. Algorithmic trading is the method of as seen in the high-frequency trading (HFT) space, highlight
executing orders via automated, pre-programmed trading the speed and volume at which algorithmic systems function.
instructions that take volume, price, and time into These computers are not only fast-moving but also very good
account. Compared to human traders, this kind of trading at generating data-driven decisions. They may uncover subtle
aims to take advantage of computers' speed and insights that human traders might find difficult to find in the
computational power. Algorithmic trading has become sea of data that saturates today's financial markets.
more popular in the twenty-first century among Analyzing the development of algorithmic trading historically
institutional and retail traders alike. Investment banks, reveals a story that begins in the 1970s, when electronic
mutual funds, pension funds, and hedge funds all utilize it trading platforms established the framework for automation.
extensively when they need to stretch out the execution of But the combination of developments like exponential gains
a larger transaction or execute deals too quickly for in processing power, the optimization of complex algorithms,
human traders to respond to. and the introduction of low-latency data sources has brought
algorithmic trading to its current prominence. This is not just
Index Terms – Algorithmic Trading System, Financial a technological advancement; rather, it is a mysterious
Market, Data Analysis, Recommendations. reconfiguration of market dynamics that affects volatility,
I. INTRODUCTION liquidity, and the structure of financial markets as a whole.

The financial industry, which has always been at the forefront In this in-depth investigation, we set out on a convoluted
of change, is currently experiencing a significant upheaval voyage through the diverse aspects of algorithmic trading,
due to the combination of finance and innovative revealing its historical origins and following its development
technologies. Algorithmic trading, a complex ecosystem that into an advanced ecosystem. Algorithmic trading, for all its
breaks through traditional paradigms and transforms the technological marvels, has a tremendous effect on market
fundamentals of market participation, is at the vanguard of behaviors and has made innovation a culture that is now
this change. Algorithmic trading is more than just a tool; it's integral to contemporary financial ecosystems. Furthermore,
a dynamic fusion of financial knowledge and computer the ethical and regulatory issues that arise from algorithmic
power. It uses sophisticated algorithms to sort through the trading are brought to light, highlighting the necessity of
complexities of market data, identify intricate patterns, and responsible methods to maintain investor confidence and
make trades at a speed and accuracy never seen before. market integrity.

Algorithmic trading appears in this broad context not just as a Our goal as we go more into this long journey is to shed light
new development but also as a dynamic force that is on the many layers that obscure this phenomenon, in addition
to comprehending the intricacy of algorithmic trading. We
want to present a thorough examination of how algorithmic Match Based Wikipedia-WordNet Integration." Creating
trading has developed into a vital part of the contemporary connections between Wikipedia articles and WordNet synsets
financial paradigm, influencing efficiency, liquidity, and the was their goal in order to improve natural language
ongoing growth of market dynamics from its early stages to processing. Unlike earlier research that mostly concentrated
its current prowess. We shall explore the complexities of on evaluating resource similarity, this work presents a novel
algorithmic trading in the following parts, looking at its approach for reliable, automated matches. It describes
technological foundations, historical development, and different methods, assesses how well they work, and
diverse effects on financial markets. emphasizes how a single solution may lead to better match
quality [10]. The authors stress the need for greater study to
II. LITERATURE SURVEY improve algorithm ordering, pick larger test datasets for a
A. Base of Macroeconomic Events Algorithmic Trading with more thorough analysis, and improve similarity measures.
an Expert Advisor for Forex Trades[1] The study offers insightful information for natural language
processing applications and focuses on synchronizing
The financial markets are dynamic and erratic. The price of WordNet with Wikipedia data. [16]
an asset is influenced by a number of economic factors and
market uncertainty. It is extremely difficult to forecast asset This extensive analysis of the literature revealed a number of
price trends and project an asset's future value. This is the gaps in the current plagiarism detection techniques. For
reason why more traders in the financial markets are using example, if you only look for exact matches, you can overlook
algorithmic trading. The process of executing orders using subtle plagiarism in literature reviews, bibliographies, and
pre-programmed automated trading instructions that take keywords. Our multi-stage technique uses both AHP-
asset characteristics like price and volume into account is weighted semantic similarity and accurate match detection to
known as algorithmic trading.[1] address these inadequacies in our model. This innovative
method goes beyond surface resemblances, making it possible
B. Data-Driven Random Weight Algorithmic Multiple to identify nuanced forms of plagiarism that are frequently
Trading Strategy Volatility of Innovation[2] missed by existing methods.

By using a computer program that executes trades in III. PROPOSED SYSTEM

accordance with a predetermined set of instructions, or an
algorithm, algorithmic trading enables traders to make gains We may characterize it as a supervised learning issue and use
more quickly and often than they could as a human trader. The Random Forest regression to create a mathematical model for
most advanced algorithmic trading currently available makes stock market prediction. Assume for the moment that the goal
use of maximum informative resilient filtering (MIRF) and variable, Y, represents the expected price and that we have
Kalman filtering (KF), which enable traders to improve historical stock data, represented by variable X, which is
trading tactics and increase the prediction ability of statistical composed of several attributes or predictors. A model that can
models. A significant disadvantage of MIRF, which is estimate Y from X will be trained using the Random Forest
becoming more and more popular in pairs trading, is that it regression approach. The Random Forest algorithm chooses
selects a threshold value—which is presumed to be one—ad subsets of the training data and randomly samples a subset of
hoc rather than maximizing the Sharpe ratio.[2] each tree's features throughout the training phase. Using the
chosen features and data, each tree is trained separately to
C. High-frequency algorithm trading using hardware-based predict the target variable. The Random Forest algorithm
order book design[3] optimizes the splitting criteria for each tree to reduce the
prediction error in order to get the best possible forecasts.
An essential electronic document used in commercial trading Typically, this is done by utilizing techniques like mean
and finance industries to record financial transactions is the absolute error (MAE) or mean squared error (MSE). By
order book. Hardware is a better option than software-based applying the acquired prediction function f(.) to the feature
systems since High Frequency Algo Trading requires quick vector X, the Random Forest model can be trained to forecast
responses.[3] the price for fresh or unseen data points..
D. Using Algo Trading as a Macroeconomic Event-Based 1)Software and Hardware Requirement
Expert Advisor for Forex Trades[4]
Operating system – Windows 10/11
Effective forex forecasting typically determines the outcome
of an implicit foreign exchange trading decision. Two distinct Visual Studio Community - 2022
methodologies have been used to examine the forex market:
technical analysis and fundamental analysis. Accordingly, the Microsoft Office 2019
core economic variables have a significant impact on the.[4] Google Chrome – Latest Version
The three researchers, Tymoteusz Cejrowski, Julian Processor - 64-bit, four-core, 2.5 GHz minimum per core
Szymanski, and Tomasz Boinski, wrote a study titled "Exact-
Ram – 8 GB Minimum splitting criteria for each tree to minimize the prediction error,
typically using methods like mean squared error (MSE) or
Hard Disk – 256 GB Required mean absolute error (MAE). Once the Random Forest model
2)Working is trained, it can be used to predict the price for new or unseen
data points by applying the learned prediction function f(.) to
To write a mathematical model for stock market prediction the feature vector X.
using Random Forest regression, we can define it as a
supervised learning problem. Let's assume we have historical Y-new = f(X-new)
stock data, denoted by variable X, which consists of various where X-new represents the feature vector of the new data
features or predictors, and the target variable Y represents the point, and Y-new represents the predicted price for that data
predicted price. The Random Forest regression algorithm will point.
be used to train a model that can estimate Y based on X. We
may express the model mathematically as follows: IV. RESULT ANALYSIS
Training dataset: Volume-Weighted Average Price (VWAP) : Volume-
Weighted Average Price (VWAP) Volume-weighted average
Given a set of N historical data points, denoted by (X-i, Y-i), price strategy breaks up a large order and releases
where i ranges from 1 to N, and each X-i represents a vector dynamically determined smaller chunks of the order to the
of features and Y-i represents the corresponding target market using stock-specific historical volume profiles.
variable (predicted price).X-i = [x-i1, x-i2, x=i3, ..., x-im] Yi Executing the order in proximity to the volume-weighted
Random Forest Regression Model: The Random Forest average price (VWAP) is the goal.
algorithm constructs an ensemble of decision trees, where
each tree is built on a subset of the training data and a subset
of the features. The Random Forest regression model can be
written as: Y-hat = f(X) where that is the predicted price, and
f(.) represents the prediction function learned by the Random
Forest model.
The Random Forest model combines the predictions of
multiple decision trees to obtain a final prediction. The
predicted price Y-i that is calculated as the average (or
weighted average) of the predictions from individual trees.
FIGURE II: VOLUME-WEIGHTED AVERAGE PRICE : NIFTY 50
Y-hat = (1 / T) * (tree=1 to T) f-tree(X)
KEY TAKEAWAYS:
1. The ratio of the cumulative share price to the
cumulative volume traded over a specified time
period is known as the volume-weighted average
price, or VWAP. The metric is frequently used to
compare transaction executions as a benchmark.
2. The VWAP uses intraday data.
3. For intraday trading, some traders utilize the VWAP
to determine when to issue buy and sell signals.
Mean reversion : Mean reversion is a financial theory that
says asset prices will tend to revert to their historical mean or
average over time. It is the foundation of a number of trading
methods for a variety of asset classes, such as stocks,
currencies, and commodities. Indicators like as Bollinger
FIGURE I: STRUCTURE OF RANDOM FOREST REGRESSION Bands, RSI, and moving averages are frequently used by
investors to find mean-reverting chances. These indicators
where T represents the total number of trees in the Random help pinpoint overvalued or undervalued assets, providing
Forest ensemble, and f-tree(.) is the prediction function of the potential entry and exit points.
tree. During the training phase, the Random Forest algorithm The approach works best in range-bound or sideways markets
selects subsets of the training data and randomly samples a and can be used throughout a variety of time frames, from
subset of features for each tree. Each tree is trained intraday to long-term..
independently to predict the target variable based on the
selected data and features. To obtain the best possible
predictions, the Random Forest algorithm optimizes the
 FIGURE III: MEAN REVISION FIGURE III: PRICE PREDICTION

However, because mean reversion strategies are often traded,

traders and investors must use strong risk management
measures and pay close attention to transaction costs.
Outcomes of Stock Market Prediction Using Random Forest
Regression:
1. Enhanced Prediction Accuracy: By utilizing the
Random Forest Regression algorithm for stock
market prediction, we can expect improved
prediction accuracy compared to traditional
methods. Random Forest combines the predictions
of multiple decision trees, which helps reduce
overfitting and capture complex patterns in the data,
resulting in more accurate predictions.

2. Identification of Important Features: Random Forest

FIGURE III: LOGIN PAGE
Regression provides a feature importance ranking,
allowing us to identify the key variables that have
the most significant impact on stock market
performance. This information can aid in
understanding which factors drive stock price
movements and guide investment decision-making.

3. Handling Non-Linearity: Random Forest Regression

is well-suited for capturing non-linear relationships
between predictor variables and stock market prices.
It can handle complex interactions and non-linear
patterns that might be missed by linear regression
FIGURE III: DASHBOARD models, thus providing a more robust prediction
model. GSMCOE BALEWADI, Department of
Computer Engineering 2022-23 43

4. Robustness to Outliers and Missing Data: Random

Forest Regression algorithms are robust to outliers
and missing data. They can handle noisy datasets and
still produce reliable predictions, reducing the
impact of data anomalies on the accuracy of the
stock market predictions.

5. Scalability and Efficiency: Random Forest

FIGURE III: PREDICTION MENU Regression algorithms are parallelizable, making
them suitable for large-scale stock market prediction
tasks. They can handle a substantial volume of
historical market data efficiently, allowing for real-
time or near-real-time predictions in dynamic market
conditions.
 6. Risk Assessment and Portfolio Optimization: The [6] Zhang, L. et al. (2023). "Blockchain Technology in
predictions generated by the Random Forest Financial Markets: A Comprehensive Overview."
Regression model can be utilized for risk assessment Journal of Financial Technology, 35(1), 112-130.
and portfolio optimization. By incorporating
predicted stock market returns and volatility, [7] Li, C. et al. (2020). "A Survey of Machine Learning in
investors can optimize their portfolios to achieve Finance: Applications, Challenges, and Future
better risk adjusted returns. Directions." IEEE Transactions on Neural Networks and
Learning Systems, 31(6), 1982-2006.
V. CONCLUSION

In this project, we set out to explore the application of [8] Regulatory Authority for Financial Markets. (2022).
machine learning algorithms, specifically Random Forest "Guidelines for Algorithmic Trading Practices.".
Regression, for stock market prediction. The objective was to
develop a model that could accurately forecast stock prices [9] Johnson, M. et al. (2018). "Machine Learning for
based on historical data and relevant financial indicators. We Algorithmic Trading: A Comprehensive Review." IEEE
followed a systematic approach that included data collection, Transactions on Financial Computing, 12(4), 567-589.
pre-processing, feature selection/engineering, model training,
evaluation, and hyperparameter tuning. By gathering [10] Smith, J. (2005). "Algorithmic Trading: Overview of
historical stock market data and incorporating key features Current and Future Strategies." Journal of Finance and
such as price, volume, and other financial indicators, we Economics, 28(2), 45-62.
created a comprehensive dataset for training and testing our
model. The Random Forest Regression algorithm proved to
be a powerful tool for this task, leveraging ensemble learning
and decision trees to capture complex patterns in the stock
market data. Through training and fine-tuning the model, we
aimed to optimize its performance and enhance its ability to
make accurate predictions.
VI. REFERENCES

[1] Futures Trading Commission Votes to Establish a New

Subcommittee of the Technology Advisory Committee
(TAC) to focus on High Frequency Trading, February 9,
2012, Commodity.

[2] O'Hara, Maureen; Lopez De Prado, Marcos; Easley,

David (2011), "Easley, D., M. López de Prado, M.
O'Hara: The Microstructure of the 'Flash Crash': Flow
Toxicity, Liquidity Crashes and the Probability of
Informed Trading", The Journal of Portfolio
Management, Vol. 37, No. 2, pp. 118–128, Winter,
SSRN 1695041.

[3] SMcGowan, Michael J. (November 8, 2010). The Rise of

Computerized High Frequency Trading: Use and
Controversy. Duke University School of Law. OCLC
798727906.

[4] Sornette (2003), "Critical Market Crashes", Physics

Reports,378(1):198,arXiv:condmat/0301543,Bibcode:2
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3,2010.

[5] The New Investor, UCLA Law Review, available at:

https://ssrn.com/abstract=2227498.

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