Algorithmic trading is trading, the main tool of which is software. The software helps to place orders according to defined specific trading criteria taking into account time, volume and price.
Algorithmic trading: pros and cons of using the approach
This approach makes it possible to conduct trading operations without human involvement. Algorithmic trading is an indispensable tool for operations in investment banks, pension funds. It is used for various institutional traders. With the help of this approach it became possible to reduce risks and influence on the market by dividing large operations into a number of small ones. The generation and execution of orders is automatic, which greatly simplifies procedures on the stock market.
Algorithmic trading has a separate class – high-frequency trading. It is used when it is necessary to solve complex tasks. The computer processes an array of information in a matter of seconds and offers an optimal outcome, while it takes a lot more time for a person to do it.
The use of software for trading operations gave impetus to the development of the market and its structure, changing the approach to calculating the expected liquidity. Algorithmic trading is suitable for analyzing various investment strategies, including playing on the interchange spread, market timing, arbitration or speculation. Investment operations can be carried out using algorithmic trading tools or fully automated.
While in 2006 30% of all transactions with shares in the U.S. and the European Union were conducted using digital algorithms for trading, by 2009 they had grown to 65%. However, in 2012 the share of algorithmic trading decreased to 50%.
The most popular specialized software is in the USA and Europe. The Forex market also uses an algorithmic approach, and more than 20% of trading operations with currency options are conducted using digital solutions.
But this approach has its downsides. Using algorithmic trading, it is not always possible to determine the exact profit. According to the research, 300 hedge funds and large companies, where the majority of trading operations are carried out using computer algorithms, last year increased their capital by 21 billion dollars, which is quite a modest amount for such important market players.
Therefore, many do not approve of the use of algorithmic trading tools. In the U.S. there are serious disputes over the fact that such computer solutions have caused the market to fall and increase its volatility.
Now world exchanges use modern software for trading and it is difficult to imagine what will happen if digital algorithms prove to be ineffective.
