This year marks the fiftieth anniversary of the Black-Scholes model, the first mathematical method to inform the execution of a trade based on the theoretical value of derivatives. While revolutionary at the time, in today’s data-fuelled financial markets an increasing number of traders are looking towards more sophisticated ways of honing their trading strategies, in the form of ‘algo wheels’.
Algo wheels refer to the technology used by dealing desks to automate the process of selecting and executing orders with algo liquidity providers (LPs) based on a pre-set criterion. They work by randomly determining where the next trade will be routed based on various rules, such as round robin, in which one algo provider after another is selected for each order, or weighted average, where x% of the orders will be routed to y algo…
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