For traders who are in the hunt for arbitrage opportunities in the market, we explain how algorithmic trading works. Algorithmic trading refers to automation of the process of placing orders by using a software that runs on mathematical programs.
One of the key applications of this software that runs on a coded algorithm is — arbitraging. Jobbers, who play on the price differences between the NSE and the BSE or spot and futures market, needn’t stare at multiple screens to identify an opportunity for arbitrage.
Quick spotting, precision in deciphering a trade’s worth and order execution speed are highlights of algorithmic trading. By avoiding human intervention algorithmic trading enables swift order execution.
Let’s now see how the algorithmic software works:
Step 1: As the opening bell goes, price feeds from different exchanges flow into the trader’s terminal.
Step 2: The algorithmic software monitors price ticker and will be in a constant search for opportunities to execute the set orders. On finding matching set of data, orders are triggered and they fly to the exchange in rapid speed.
Step 3: The order hits the exchange’s server and gets executed, sending back a confirmation to the trader.