Algorithmic Trading and DMA

Johnson, an execution specialist, wrote a technical reference on how orders are actually executed in electronic markets, covering market microstructure, execution algorithms and direct market access.

The microstructure sections explain how modern markets work: order types, the limit order book, matching rules and priority, market fragmentation across venues, the different market models including quote-driven and order-driven markets, and the differences across asset classes and geographies.

The cost framework is the analytical foundation. Johnson decomposes execution cost into explicit components, meaning commissions, fees and taxes, and implicit components, meaning bid-ask spread, market impact from the order's own effect on price, timing risk from price movement during execution, and opportunity cost from unexecuted quantity. He explains implementation shortfall, which measures the difference between the price when the decision was made and the price actually achieved, and argues it is the correct benchmark because it captures everything.

The algorithm sections cover each family and what it optimises. Time-weighted and volume-weighted average price algorithms spread an order over a period to match a benchmark, which controls tracking error rather than cost. Percentage of volume algorithms participate at a set rate. Implementation shortfall algorithms trade off market impact against timing risk explicitly, trading faster when volatility is high. Liquidity-seeking algorithms search across venues including dark pools. He covers the parameters each exposes and how to select among them given order size, urgency and the security's liquidity.

The book is technical and written for practitioners. It is dated in market specifics since 2010, particularly on dark pools, on venue structure and on the regulatory framework in both the United States and Europe. The cost framework and the algorithm logic have not changed.