Nowadays algorithmic trading is one of the hottest topics of marketplace trading. However, the experts have different opinions about its reasonability. Some consider it creates barriers for ordinary traders, causes movements of prices for highly liquid instruments. Others predict promising future for the algorithmic trading. And many don’t understand at all why this issue provokes so many discussions.
What is algorithmic trading and what advantages and prospects it has? A fact-based analysis answers these questions with regard to their convenience and functionality for private investors, traders, small companies. It’s not rational in such case to examine a complicated schemes and mechanisms of high-speed robot work used by the banks, hedge funds and market-makers, as these financial institutions have complex strategies. So, simple trading algorithms are the best for the initial studying.
Algorithmic trading (algorithmical, robotic trading) is trading by means of special software enabling to fully computerize the trading process. All actions of the robot are regulated, comply with the preset parameters (entry, position exit, breakeven point or marginal negative value for closure, additional purchase, allowed risk).
Algorithmic trading shouldn’t be confused with a systematic approach in usual trading when a trader chooses a constraint system and follows it.
« Algorithmic trading means automation and robotic application of the trading and the software control over it. »
This considerably simplifies a trader’s work, dispenses from the necessity to constantly follow the situation on the stock exchange. It’s enough to set the parameters, borders and factors of your trading strategy in the software and the robot will follow the preset parameters automatically.
A quarter of a century ago the traders on the exchanges informed they were ready to buy or sell the shares by means of gestures and outcries. Ten years ago it was already enough for the transaction to call the broker. But the progress is forging ahead.
General computerizing process has started in the 21 century, the deals are already made much faster. Due to the powerful computers the instructing for the broker is no longer needed, it’s enough to check a relevant instrument, its trend and volume in the terminal by personally.
These changes resulted in a situation where many traders, who were successful before, met with failure in the new working conditions. Only quick adaptation to the changed realities allowed to remain in the system.
The next step of trading development was trading with implementation of algorithms, which were the most popular among the speculators. According to expert’s estimates the robots perform about 70% deals on the New York stock exchange, 90% – on FORTS trading floor of Moscow exchange, nearly 60% – on Moscow Central Stock Exchange.
A volume of deals performed by the robots is so great the special limitations were set for a number of sent but not closed orders. Order overstock overloads servers and disguises the market situation. The most active robot sent 7 million orders during the trading session that makes more than 200 orders every second, 13.5 thousand orders were not executed. To partially decrease the overload and avoid such negative developments the Moscow stock exchange set a dedicated fee since 2012 for the traders who sent more than 100 thousand unrealized orders within the session.
Algorithmic trading can provide a high income level. The Moscow stock exchange annually holds contests “The best private investor”. In 2011 United Traders became a winner earning 7832 % (12 million roubles of 155 thousands) for four months. In 2012 this robot won again showing 5288 % profitability (2.65 million roubles of 50 thousands).
Algorithmic trading significantly expands opportunities of traders and companies, doesn’t hold out for a manual trading, and surpasses it by many indices. How it’s achieved, what are the peculiarities of practical implementation, as well as pros and cons, read in the next article.Login in Personal Account