What is 'Algorithmic Trading'
Algorithmic trading, also referred to as algo trading and black box trading, is a trading system that utilizes advanced and complex mathematical models and formulas to make high-speed decisions and transactions in the financial markets. Algorithmic trading involves the use of fast computer programs and complex algorithms to create and determine trading strategies for optimal returns.
Some investment strategies and trading strategies like arbitrage, intermarket spreading, market making, and speculation may be enhanced through algorithmic trading. Electronic platforms can completely operate investment and trading strategies through algorithmic trading. As such, algorithms are able to execute trading instructions under particular conditions in price, volume, and timing.
The use of algorithmic trading is most commonly used by large institutional investors due to the large amount of shares they purchase every day. Complex algorithms allow these investors to obtain the best possible price without significantly affecting the stock's price and increasing purchasing costs.
Benefits of Algorithmic Trading
Algo-trading provides the following benefits:
Trades executed at the best possible prices
Instant and accurate trade order placement (thereby high chances of execution at desired levels)
Trades timed correctly and instantly, to avoid significant price changes
Reduced transaction costs
Simultaneous automated checks on multiple market conditions
Reduced risk of manual errors in placing the trades
Backtest the algorithm, based on available historical and real time data
Reduced possibility of mistakes by human traders based on emotional and psychological factors