Algorithmic tradingThere are only two simple conditions for a successful trading practice – Timely access to market statistics and expeditious trading executions! Although these two conditions are readily intelligible, highly unachievable by any human trader due to their inherent limitations that paved way for the rise of sophisticated algorithmic trading!

Algorithmic trading is no more a buzz but the very identity of the technologically thriving Wall Street, where according to Valerie Bogard, an equity analyst at the research and consulting firm Tabb Group, the algorithmic trading dominates nearly 90% of the trading market, although there is no significant way for quantifying it. 

But, a new report released by JPMorgan, indirectly substantiates the above-mentioned growing influence of the algorithmic trading, where, according to its global head of quantitative and derivatives research, Marko Kolanovic, only 10% of stock trading volume is accounted by the ‘fundamental discretionary traders’, whereas, the majority, that is about 60% is accounted by ‘Passive and Quantitative’ investing method.This shows, the contemporary algorithmic trading is rewriting the conventional methods of the stock trading practice, so quickly, yet, more accurately!

The diversified world of algorithmic trading

Although broadly, the algorithmic trading is referred to as the form of trading practice which involves the programming knowledge of the computer to predict the market movements and execute the trade automatically, a deeper investigation proves the underlying complexity and the diversities prevalent.

  • Execution algorithms

This type of algorithm is mainly preferred by the institutional investors, who believe in enjoying maximum benefits, without creating any adverse market situations. That is, instead of executing a large market order in a single go, they rely upon such algorithms to slice up the orders into many smaller pieces so that they could be submitted to the market gradually and strategically in such a way as to gain the desirous benefits favorably!

  • Market-making algorithms

These algorithms are here to do the role of the fundamental discretionary traders, who signal the market movements aka, who are responsible for maintaining the order during the fluctuating market situations. Since these algorithms do a better role than the human traders by providing more accurate and much faster predictions, naturally, the industry prefers the outcomes of the technology more than the unreliable and unsophisticated human traders.

  • Proprietary algorithms

These are more specialized algorithms that have the ability to decide what to buy or sell on their own so as to achieve the necessary profits. Such types of algorithms are used by critical players like the trading firms and the investment banks to gain profits from transitory price differentials. The very popular ‘High-Frequency Trading’ belongs to this proprietary algorithm category!

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The future of algorithmic trading

The algorithmic trading is not only on the rise in developed countries like America, where 70% of the total trading volume is constituted by it, even in the developing countries like India, the preferences towards it are slowly increasing, where it has already accounted for nearly 40% of the total Indian trading market. This shows, the future of the trading is, either ‘the quants way or no way’! Although the ever-growing technology would accommodate for the minor flaws of the practice, the underlying major threat is the unavailability of universal stringent regulations to check the malpractices and the technical irregularities breaching the growth of the practice. But, even here, the relief is seeming to be likely, as popular trading companies like CME Group has already taken the initiative!


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