Algorithmic trading and its benefits

Algorithmic trading and its benefits

Finance and growth go side by side. Every financial institution has been benefited by this growth. The growth is never ending and it will keep on growing the market. There are many unique innovations that have taken place in the securities market. One such big innovation that changed the market was the use of Algorithmic Trading.

Algorithmic trading is a use of software that will help in executing the trade according to a market trend. Algorithmic trading has lead to the automation of the trading process. Algorithmic trading can be divided into two parts:

  • Execution algorithm: This algorithm is important for large trades that take place in the market. The trades get placed according to the market trend and timing and it aims to reduce the costs of the trade by slicing the orders.
  • HFT algorithm: HFT is the acronym used for High Frequency Trading. This algorithm helps us to trade on the basis of information. It analyses the data gives the information and places the trade. The trades placed usually last less than a day and sometimes only for few seconds. The trade gets placed within fraction of seconds and derives profits on the basis of information.

Some of the positive effects that happened after the introduction of Algorithmic trading are:

  • Placing of large trades: Algorithmic trading helps in placing the large trades at the best price possible. It makes the trades according to the trend that keeps on going everyday in the market. This also helps in reaching the minimum execution price for a particular trade.
  • Liquidity in the market: Algorithmic trading has helped in making and maintaining liquidity in the market by quickly matching the buy and sell requirements in the market.
  • Lower cost: The human traders usually charged a lot of brokerage which increased the cost. Algorithmic traders has provided people with low brokerage high exposure and also the normal trading brokerage is also less and this has lead to the reduction in overall costs
  • Less Spreads: Due to the low latency service provided by HFT algorithms the overall bid ask spread gets decreased and the investor gets the best price with low cost and higher profits.
  • Price efficiency: Prices will obviously be efficient when all the information relating to the stock is reflected in the price. All the market related information of the stock will lead to a trade taking place which will affect the price and the price will automatically adjust according to the information. Also it helps in removing any arbitrage opportunity by taking advantage of the situation.
  • Promotes competition: Algorithmic trading has increased a lot of competition among different trading companies. All the companies compete with each other to execute trades at best price.

There are different trading venues that participate in the algorithmic trading process but this system has lead to some disadvantages as well. Through algorithmic trading unhealthy competition is promoted too as a company can send a fake order and then cancel that order. While the other algorithms will get busy in judging the fake trade, the other company will take the benefit of this opportunity. But on the whole HFT has helped a lot in development of market.-

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