Algorithmic Trading

Algorithmic Trading

In Trading World algorithms have become very common feature which every broker trying to offer their clients demand. we can call it as mathematical models that analyze every quote and trade in the stock market and identify liquidity opportunities and turn the information into intelligent trading decisions.Algorithmic trading, or computer-directed trading, cuts down transaction costs, and allows investment managers to take control of their own trading processes. It is a style of trading and not a separate business.

In Future the rise in use of algorithms has on the trading environment, fund managers, and buy-side traders, as well as on integration issues, build or not to build. The paper also discusses the emerging algorithmic trading trends. Algorithm innovation continues to offer returns for firms with the scale to absorb the costs and to reap the benefits.

Algorithmic Trading Introduction
In this competitive technology and cost effective world, the fund managers and buy-side traders have turned to computerized algorithms provided by brokers. Algorithms have become a must-have for brokers seeking to gain new business and retain their current clientele. Trade carried out using algorithms is known as algorithmic trading. Algorithmic trading can be defined as “placing a buy or sell order of a defined quantity into a quantitative model that automatically generates the timing of orders and the size of orders based on goals specified by the parameters and constraints of the algorithm”. The rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on the price of the financial instrument. Algorithmic trading is a way to codify a trader’s execution strategy. Algorithmic trading or computer-directed trading cuts down transaction costs and allows fund managers to take control of their own trading processes.

Buy side firms are gravitating toward rules-based systems. For example, instead of placing 1,00,000-share order, an algorithmic trading strategy may push 1,000 shares out every 30 seconds and incrementally feed small amounts into the market over the course of several hours or the entire day. By breaking their large orders into smaller chunks, buy-side institutions are able to disguise their orders and participate in a stock’s trading volume across an entire day or for a few hours. The time frame depends on the traders’ objective, how aggressive they want to be, and constraints such as size, price, and order type, liquidity and volatility of the stock and industry group. More sophisticated algorithms allow buy-side firms to fine-tune the trading parameters in terms of start time, end time, and aggressiveness. Algorithmic trading is appealing to buy-side firms because they can measure their trading results against industry-standard benchmarks such as volume weighted average price (VWAP).

Algorithmic trading volumes are currently driven by sell-side proprietary traders and quantitative hedge funds. In their never-ending quest to please their customers, being the first to innovate can give a broker a significant advantage over the competition, both in capturing the order flow of early adopters and building a reputation as a thought leader. It is possible to create an algorithm and enjoy a significant time window ahead of the competition if that algorithm addresses a really unique execution strategy.

Location: India

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