Black Boxes, Algo trading, what are these names?

The team at Madscan strives to make its stock scanner software the best in the trading industry. Madscan will soon be adding an auto trading system to its signal server. This will allow users to create a scan and trade it automatically through an algorithmic system. We have heard the terms black box, grey box and algorithmic trading…in this post we hope to give you a better definition of what these are, and how you can incorporate them into your trading strategy.
What is Auto Trading?
Auto Trading is essentially a strategy whereby you can place buy or sell orders using a stock scanner software program to handle trades automatically, and execute them based on a specific set of criteria. These systems are generally used by active traders who enter and exit positions much more frequently than common investors. They can be applied to many different markets including stocks, options, futures and Forex. Some of the features of an auto-trading system include; controlling trade size, trading different markets, the ability to modify criteria, auto-sync features and trading on multiple systems simultaneously.

Algorithmic (algo) Trading
Algorithmic or Auto trading involves the use of computerized systems that handle the entering and exiting of trades based on proprietary algorithms. These systems automate various aspects of trading including timing, price, quantity and the initiating of trades. There are different systems, like black box and grey box, and is widely used by mutual funds, pension funds and highly active investors.

In 2006, one third of all US and EU trades were initiated by algorithmix trading systems. These numbers have crept up to over 60% in 2009, and increasing popularity of black box and grey box systems has no end in sight.

Grey Box and Black Box Trading Systems
Grey boxes are used to create trading suggestions from an algorithm, usually found in sophisticated stock scanner software systems. Sometimes, users are allowed to modify the algorithm to fit the trader’s strategy. With grey box systems, there is a bit of human intervention…meaning that the automated component will get you into the trade, but you have to manually exit, or, it will exit the trade for you if you manually enter it.
The main difference with a black box trading system is the undisclosed nature of the proprietary algorithm. A stock scanning software program with a black box system provides trading recommendations and also provides complete automation, meaning that it gets you in and out of trades based on a certain set of criteria. Capabilities of these systems include basket trading and signal trading. Madscan will soon create custom signals to be executed through their auto trader component in a later version.
The black box part of an auto trader system has many calculations and formulas which the user does not see, or even need to see in order to use the system. These systems have become extremely popular of late, attracting the likes of robot scientists, astrophysicists, economists and mathematicians. This combination of economics and science has produced black box firms that have some of the best performing systems over the past decade. Check out madscan.com for more info on stock scanner software.