Algorithmic trading:
- It refers to the use of software programmes to execute trading strategies at a much faster pace.
- It utilizes advanced and complex mathematical models and formulas to make high-speed decisions and transactions in the financial markets
- Popular algos include Percentage of Volume, Pegged, VWAP, TWAP, Implementation Shortfall, Target Close
- Real purpose: They were developed so that traders do not need to constantly watch a stock and repeatedly send those slices out manually
- It is not an attempt to make a trading profit
- It is simply a way to minimise the cost, market impact and risk in execution of an order
- It is widely used by investment banks, pension funds, mutual funds, and hedge funds because these institutional traders need to execute large orders in markets that cannot support all of the size at once
- Misused: Unfortunately the term has been hijacked by those who actually mean to say automated trading system
- These do indeed have the goal of making a profit.
- Also known as black box trading, these encompass trading strategies that are heavily reliant on complex mathematical formulas and high-speed computer programs
- On the National Stock Exchange (NSE), algo trades accounted for close to 16% of all trades. On the BSE, it was 8.56% in January
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