Over the past ten years, algorithmic trading has evolved as a new stock market trend that is attracting many individual investors who want to buy shares and make profit through substantial investment. From single desk marketing to the digitized stock market of gilded age, algorithm-based stock trading is dominating the markets of U.S and UK.
Algorithmic trading is a process in which a set of instructions is used to trigger profit at a speed that is impossible to be achieved by a human trader. While executing algorithmic trading, computers process codes to quantify circuit-breakers and produce misaligned price statements across multiple levels of trading. Algorithms tend to respond immediately to the ever-changing market conditions and represent the most effective way of earning profits from stock market investment.
How Does Algorithmic Trading Work?
Whether you are an individual trader investing your capital in national stock market or a trading analysis expert, the first step to establish automated algorithmic trading desk is to learn how everything works. A major portion of algorithmic trading nowadays is based on its subset called high frequency trading that attempts to score large number of orders by operating on pre-programmed instructions and produces informed decisions for capital investment in the stock market.
An algorithmic trading platform consists of three major blocks - market adapter, complex event processing system, and order routing system. This unified architecture enables flash traders to find prospective buyers and sell thousands of shares in the fraction of seconds without involving any manual support.
Benefits of Algorithmic Trading
Technology has played an augmenting role in the build out of stock markets during the past two decades. As soon as the stock trading became automated in 1995, policy traders witnessed an emerging trend of software-based trading in commodity exchange practices, where computers use machine algorithms to place orders.
The most common algorithmic trading strategy known as trend following allows traders to use high speed information network for accessing real-time market data and generate profit in the capital market. This trading strategy uses statistical method to generate a buy signal and the trading analysis expert invest in the shares accordingly. Today, about 80 percent of the stock market trading is algo-based which is very different from the days when traders used to scream orders on the floors of securities exchange.
Impact of Algorithmic Trading on Stock Market Efficiency
The rapid development of technology has transformed the dynamics of capital markets. Gaining a significant momentum, high frequency trade execution like algorithmic trading has become a popular means of commodity exchange in the stock market. The casual impact of electronic trading on market outcome is difficult to establish. However, with the introduction of co-location in the market events, the effect of algorithmic trading is known to increase.
A recent research conducted on the impact of algorithmic trading on different characteristics of the stock market quality. It throws light on the fact that algorithmic trading is going to reshape the stock market economy as it dictates the price formulation and financial market outcomes. The beneficial role of automated algorithmic trading is evident from its growing capability of improving the market’s informational efficiency. As a result of increase in the share volumes of algorithmic trading, investors gain high access to liquidity that contributes to less transaction costs.