Understanding the Profit and Loss Distribution of Trading Algorithms

Abstract

With the advent of algorithmic trading it is essential that investors become more proactive in the decision making process to ensure selection of the most appropriate algorithm. Investors need to specify benchmark price, implementation goal, and preferred deviation strategy (i.e., how the optimally prescribed algorithm is to react to changing market conditions or prices). In this paper we describe an analytical process to assess the impact of these decisions on the profit and loss distribution of the algorithm. Understanding the Profit and Loss Distribution of Trading Algorithms, Kissell & Malamut, JPMorgan