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- 1 Algorithmic trading has gained huge popularity due to its notable merits.
- 2 This automated trading program reduces efforts and time while enhancing productivity.
- 3 It has also become a go-to choice for institutional investors and beginners in trading.
As the word suggests, algorithmic trading is the process of executing trades with algorithms. To understand it better, one has to dig deeper into algorithms and their processing. Algorithms are pre-programmed instructions that run autonomously. In the last few years, the use and adoption of algorithms have grown exponentially. Besides trading, it is being deployed in various other domains.
Understanding The Realm of Algorithmic Trading
Algorithmic trading comes with a combination of factors that optimize the process. It brings human insights, mathematical models, and complex formulas to make trading decisions. Using high-frequency trading technology, algorithmic traders execute thousands of trades per second. Furthermore, it can be used in a wide variety of situations. It can take care of trend trading strategies, arbitrage, and order execution.
The algorithm-based trading was introduced in the American financial markets for the first time. The New York Stock Exchange introduced Designated Order Turnaround (DOT) in 1976. The program routed orders from traders to specialists while enhancing the exchange’s capabilities. In the next few decades, this program helped the exchange adopt electronic trading. Author Michael Lewis brought algorithmic trading to public attention with his best-seller book, Flash Boys.
The book documented the lives of Wall Street traders who used this technology. It showed how the entrepreneurs gained advantages over their competitors using algorithms.
Benefits of Using Algorithmic Trading
This trading system comes with many fruitful advantages. They are:
Cost Reduction– This method of trading reduces one’s dependence on manpower. As a result, companies can engage in trading while spending less and gaining more.
No Human Errors– The programmed trade rules out any possibility of human errors. It never misinterprets the trends due to biases or irrational fears.
Supports Large Orders– Using algorithmic traders, investors can execute large orders seamlessly. The coded programs tackle orders with large volumes very efficiently and flawlessly.
Faster Execution– Algorithmic trading works way faster than human-driven trading systems. The former assesses situations in just a few seconds and makes decisions in a prompt manner.
Universal Accessibility– The algorithmic trading applications can be accessed anywhere. They work on laptops, smartphones, and on a range of other devices.
While gaining so many advantages, the trader may also face some cons.
Drawbacks of Algorithmic Trading
These are a few things that traders need to way of while using algorithmic trading.
System Crash– In 2010, the US market experienced a flash crash in its trading system. After analysis, experts found out that algorithmic trading caused it while executing several transactions.
Liquidity Loss– The algorithm trading creates a situation of rapid buying and selling. It eliminates the chances of traders to gain profits leading to a loss of liquidity.
Future of Algorithmic Trading
Delivering so many merits to the markets, algorithmic trading will certainly be more prevalent in the future. It has already simplified the trade for so many folks. In the following years, more institutional and retail investors will take to algorithmic trading. According to experts, it will also overcome a few challenges that it faces today. Thus, it will not be wrong to say that it is the future of trading.
Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.
