Introduction to Algorithmic Trading: Stock Market

In order to dig deeper into the algorithmic trading, we have to first look into the idea how the need for the trading algorithms was born. Without stocks and a marketplace for their circulation, the need for fast, more efficient tools would not have been required. Therefore, in this post, we are looking into the inception of the stocks and markets that eventually triggered the development trading algorithms.

The Genesis of the Stock Market

Let’s go back to 1300, to the time of the Venetian Republic that was at the time the cradle of Europe’s culture, science, and business. The money lenders of Europe, particularly Venice, filled important gaps left by the banks. Moneylenders traded debts between each other and they also bought government debts. Soon, the lenders began to sell debts to customers — the first individual investors. The Venetians were the leaders in the field and the first to start trading securities from other governments.

Origins of stock go four centuries back when European superpowers of the time began trading with each other and with countries of the New World. At the time, not much different from today, starting big business required significant amounts of capital which a single merchant couldn’t raise on his own. Nevertheless, these businesses differ from the ones we know today. On the peak of the imperialism’s, the eyes of superpowers were on East and everyone wanted to have a stake in the profits from the East Indies and Asia.

However, maritime expeditions that brought back goods from the East were extremely risky (risks of pirates, weather, and poor navigation). To diminish the risk of a lost ship ruining their fortunes, ship owners were seeking investors who would put up money for the voyage — equip the ship and crew in return for a percentage of the profits if the voyage was successful. These early limited liability companies often lasted for only a single voyage. Groups of investors put together the capital becoming partners and co-owners with individual shares in their businesses to form joint-stock companies.

In 1602, the first paper shares issued by the Dutch East India Co. started to circulate allowing shareholders to buy, sell, and trade stocks with other shareholders. Soon after, the concept spread among the maritime countries, such as Spain, Portugal, France, and eventually, it reached England where the tradition of extensive market communications began with John Castaing. Every Tuesday and Friday, he was publishing a detailed list of market prices called The Course of The Exchange and Other Things from Jonathan’s Coffee House which happened to be his base. The first stock exchange in London was officially founded in 1773.

The concept made its way to American colonies in next years. The first so-called stock exchange was founded in Philadelphia but soon the centre of business moved to New York, more specifically to Wall Street where a group of twenty-four brokers signed the Buttonwood Agreement on May 17, 1792, and thus lay the foundations for the New York Stock Exchange, the establishment that will later dictate the world’s economy.

The first beginnings of High Frequency Trading

The first beginnings of High Frequency Trading are closely connected to the information flow advancement and are dated to the turn of the 18th century when the Rothschild banking family developed a network of agents, shippers, couriers, and even a pigeon troops to diffuse information across Europe and more importantly to outrun the established communications. Among others, the information they were operating with on long distance contained the stock prices, market movements from across Europe and other banking related data.

However, the high frequency trading and the development of algorithmic trading started in 20th century with the booming appearance of informational technology. In the next posts, we will move from historical facts and focus more on the development of the algorithmic trading as we know it today, the algorithms that we are developing.

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