WHAT IS ALGORITHMIC TRADING?

July 11, 2016

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ALGORITHMIC TRADING is an electronic platform that executes pre programmed orders with an algorithm based on timing, price or quantity of orders. Orders are executed by the computer without human intervention, resulting reduction in speed of execution from milliseconds to microseconds. Big Institutions involved in trading use algorithmic trading and forms the basis of high frequency trading (HFT),What that exactly means is other than just watching charts they actually write a strategy, back test it to see if it would have made money and once decided the strategy gets automated to transact large orders at extremely high speeds. algorithmic trading, used by 85% people in U.S has a slow pick in India as awareness about this particulate trading platform is not much among market participants.

Algorithmic trading may be used in any investment strategy, including market making(MM),general market participants(GMP), inter-market spreads, arbitrage, or pure speculation including trend following. The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically.

TECHNICAL REQUIREMENTS FOR ALGORITHMIC TRADING

The challenge is to transform the identified strategy into an integrated computerized process that has access to a trading account for placing orders. Implementing the algorithm using a computer program is the last part, clubbed with backtesting The following are needed:

  • Computer programming knowledge to program the required trading strategy, hired programmers or pre-made trading software.
  • Network connectivity and access to trading platforms for placing the orders
  • Access to market data feeds that will be monitored by the algorithm for opportunities to place orders
  • The ability and infrastructure to back test the system once built, before it goes live on real markets
  • Available historical data for back testing, depending upon the complexity of rules implemented in algorithm