Algorithmic trading, often referred to as algo trading, is the use of computer algorithms and mathematical models to automate the process of trading financial securities in markets. These algorithms are designed to execute trading orders at high speeds and frequencies, making decisions based on pre-defined criteria without human intervention. Algo trading is widely used by institutional investors, such as hedge funds, pension funds, and investment banks, as well as individual traders.
Algo trading has significantly transformed financial markets by increasing trading efficiency, reducing costs, and providing liquidity. However, it also raises concerns about market stability and the potential for algorithmic errors leading to market disruptions. As a result, regulatory bodies closely monitor and regulate algo trading activities to maintain fair and orderly markets.
Benefits of Algorithmic Trading
Algo-trading provides the following benefits:
- Trades are executed at the best possible prices.
- Trade order placement is instant and accurate (there is a high chance of execution at the desired levels).
- Trades are timed correctly and instantly to avoid significant price changes.
- Reduced transaction costs.
- Emotions-free / Stress-free trading
- Simultaneous automated checks on multiple market conditions.
- Reduced risk of manual errors when placing trades.
- Algo-trading can be backtested using available historical and real-time data to see if it is a viable trading strategy.
- Reduced the possibility of mistakes by human traders based on emotional and psychological factors.