What is Algo-Trading?
Allocation Method
Algo trading or algorithmic trading is a process of executing orders using automated and pre-programmed trading instructions. These instructions are the outcome of sophisticated mathematical formulas.
Given that algorithms can process data in a faster and more error-free manner than humans and also eliminate emotions from trading, algo trading results in better-informed decisions with real-time data.
Further these algorithms can work round the clock to capture every opportunity, as well as offer accuracy and speed not possible with human trading.
Most Algo Trading today is high frequency trading (HFT). A method of trading that attempts to capitalize on placing a large numbers of orders at rapid speed across multiple markets and multiple decision parameters based on pre-programmed instructions.
Algo-Trading is used in many forms of trading and investment activity including:
Mid-to long-term investors or buy-side firms, for example Pension funds, mutual funds, insurance companies. They use Algo-trading to purchase stocks and other securities in large quantities over time using multiple orders, when they do not want to influence stock prices with discrete, large-volume investments.
Short-term traders and sell-side participants such a market makers ( for example brokerage houses), speculators, and arbitrageurs, use Algo-Trading to benefit from automated trade execution; in addition, algo-trading aids in creating sufficient liquidity for sellers in the market.
Systematic traders such as trend followers, hedge funds or pairs traders ( a ,market-neutral trading strategy that matches a long position with a short position in a pair of highly correlated instruments such as two stocks, exchange-traded funds (ETFs) or currencies). Find it much more efficient to program their trading rules and let the program trade automatically.
Advantages of Algo-Trading
Trade execution performed at optimal prices, instantly and accurately.
Simple to use and operate. Once initiated, it is 100% automated.
Trades are scheduled correctly and executed instantly, to avoid significant price changes.
Lowered transaction Costs.
Simultaneous automated checks on multiple market conditions that might affect trade efficiency and profitability.
Eliminates risk of manual errors when placing trades.
Algo-Trading can be back tested using available trading strategy before implementing in a live trading environment.
Eliminates emotional and psychological factors associated with human traders.
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