LEARN / TRACK 1
What professional trading systems actually do
Most professional algorithms do one narrow job: quote prices, work a big order, ride a trend or trade a price relationship. Speed and low costs decide whether that job pays.
Five jobs behind the word “algorithm”
An algorithm is a procedure: inputs, steps and an output. The SEC describes several distinct uses in capital markets. They do different jobs. SEC ↗
1. Make a market
A market maker posts a price to buy (bid) and a price to sell (ask). It may capture the spread between them. It can also be left holding an asset whose value falls. This needs fast quotes, inventory limits and a way to hedge or reduce exposure.
2. Execute a large order
An execution algorithm splits an order into smaller pieces. TWAP spreads them over time; VWAP follows a volume-weighted schedule or benchmark. The goal is to manage market impact and execution cost for an order that already exists, not necessarily to forecast the next price. FINRA lists VWAP/TWAP as automated trading tools. FINRA ↗
3. Follow a trend
A systematic CTA can use futures rules that add exposure after sustained movement and reduce it after reversal. Some managed-futures advisers use systematic methods; others use discretion. A trend rule can lose repeatedly in choppy markets. CME describes the category and its different approaches. CME ↗
4. Test a relative-price relationship
Statistical arbitrage looks for a measured relationship among securities, then trades when prices diverge from it. Mean reversion is the hypothesis that a deviation may reverse. It needs reliable data, a stable relationship, risk limits and a realistic fill model. Real funds use it; that doesn't make a simple pair trade profitable. SEC ↗
5. Compete on speed
Some high-frequency trading systems use low-latency networks and colocation—servers near an exchange—to update orders quickly. Speed may help them react, but it also brings technology and control costs. The SEC documents these characteristics; “high frequency” is not a synonym for every algorithm. SEC ↗
Why size and infrastructure matter
Lower cost per trade, faster data, more market access and stronger risk systems can change whether a thin opportunity survives. Professional firms also face inventory, operational and competition risk. That's our reading of how the market works, not a claim about any firm's code. SEC ↗ SEC ↗
Sources
Examples marked made-up numbers are invented. Nothing in this lesson is a recorded CouchChange result or a recommendation.
Try it
A system buys $100 at a quoted ask and sells at a lower bid moments later. Did it “earn the spread”?
Think it through, then open an answer
No. Crossing from ask to bid pays the spread. A market maker tries to quote both sides, but may not receive both fills and can lose on inventory.