What is Algo trading or Algorithmic trading ?
Algo trading or Algorithmic trading is a system that uses automatic pre- programmed trading instructions to execute orders that account for variables such as time, price, and volume. It has evolved significantly since the early 1980s and is used for a number of purposes by institutional investors and major trading companies. To make use of the speed and data processing advantages that computers have over human traders, this method of trading was developed. Timing, price , quantity, or any mathematical model are the basis of the given sets of instructions. Besides the trader's benefit prospects, algo-trading makes stocks more liquid and trading more systematic by eliminating the effect on trading practises of human emotions. Popular "algos" include Percentage of Volume, Pegged, VWAP, WAP, Implementation software and Target close.
Algorithmic trading has attracted both retail and institutional traders in the 21st century. Investment banks, pension funds , mutual funds and hedger funds are commonly used that may need to spread the execution of a larger order or execute trades too quickly to respond to human traders. ar. A 2016 study showed that more than 80 percent of FOREX market trading was carried out by trading algorithms rather than by humans.
The word algorithmic trading is often used synonymously with the system of automated trading. These include trading strategies that are heavily dependent on complex mathematical formulas and high-speed computer programmes, such as black box trading and quantitative or quantum trading. Most of today's Algo-trades are high frequency trading (HFT).
Some benefits of Algo-trading
1- Traders are given the best possible prices.
2- Instant and accurate placement of trade orders
3- To avoid significant price changes, trades are timed correctly and instantly.
4- Reduced the chance of errors based on emotional and psychological factors by human traders.
5- Lower transaction costs.
7- Simultaneous automated checks on various market circumstances.
8- Decreased risk of manual mistakes when placing trades.
9- Algo-trading can be back-tested using available historical and real- time data to see if it is a legitimate trading strategy.
10- Effective for time conscious trading’s.
Here are types of Algorithmic trading strategies
1- Arbitrage opportunities
2- Trend-following strategies
3- Mathematical model-based strategy
4- Index fund rebalancing
5- Volume weighted average price (VWAP)
6- Time weighted average price (TWAP) etc.
As a percentage of total turnover, algorithmic trade in India across the cash and derivatives market has increased to 49.8 percent in eight years from just 9.26 percent on average in 2010. In March 2020, NSE data showed 44.8 percent of the volume of the cash market and 48.2 percent of the market for equity derivatives. In March 2018, 37.22 percent of trade on the BSE was guided by algo trading.
The future is exciting for Algo-trading. The global market for algorithmics is expected to grow between 2018 to 2026. Cloud-based algorithmic trading services will surpass the market and begin to emerge.