Saturday, February 14, 2015

Just What Is Algorithmic Trading?

In the simplest terms, algorithmic trading is the use of computer programs to enter trading orders with sophisticated computer algorithm. This method decides on various aspects of the order such as the timing, price, quantity of the order, and the overall initiation of the order without any human intervention whatsoever.
This trading method has because extremely popular rather quickly. In fact, a third of all EU and US stock trades back in 2006 were algorithms.

Skip ahead just three years later and high frequency trading firms now account for 73% of all US equity trading volume. While numbers have not been crunched just yet, it is predicted American and European markets will range as high as 80% with algorithm trades from 2008.
Algorithmic trading is most commonly used by pension funds, mutual funds, and other investor driven traders. The reason for this is to divide large trades into countless small trades. As a result, it helps to manage market impact and the overall risk.

Something that is gaining attention is high-frequency trading, which is a special class of algorithmic trading. This consists of computers making elaborate decisions on whether or not to initiate orders based on information that is received electronically. It speeds up the thinking process as recommendations can be made before human traders are even capable of processing the information.
The primary concern with high-frequency trading is how difficult it is to determine how profitable it is. Regardless, there is no denying the fact that algorithmic and high frequency trading have frequently been the talk of the market. It is often used with any investment strategy such as arbitrage, market making and trend following.
The effects are evident as it is decreasing trade sizes. Jobs that were at one time done by human traders are now being switched to computers. Trading platforms like IQ Broker have become extremely popular as numbers can be crunched at an incredible speed. In fact, speeds of computer connections are now being measured in microseconds.
Trading has always been about knowing the numbers, understanding when to continue and when to get out, and making the right decision at the right time. To this point, it has been difficult for a single person to track the market with time to spare on a consistent basis, regardless of the tools that were available. But algorithmic trading is changing it all.
Everything in the world is becoming increasingly technologically advanced. It only makes sense trading would turn in this direction as well. And with that, algorithmic trading has officially taken over the industry.