The Dynamics of Algorithmic Trading

Dynamics of Algorithmic Trading

Using Algorithmic Trading and High Frequency Trades could boost your trading options and perhaps your profitability too. In fact it is attracting increasing attention among market players ever since the regulator SEBI has permitted its use on exchanges .Lets analyse how technology could help you gain an edge on the markets.

Do you remember all of those slick Hollywood movies like Sneakers, Virtuosity or The Net where people use technology to gain an edge; usually monetary; over their rivals? The other day we got a peek into just such a world that at the very least left us breathless! But, at the end of the day remember that technology is a tool and it is only as good as you are!

Algorithmic Trade per se is nothing but a reflection of what happens in our brains. Algorithmic trading, also called automated trading, black-box trading, or Algo trading, is the use of electronic platforms for entering trading orders with an algorithm which executes pre-programmed trading instructions whose variables may include timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

God has given us the ability , we only do this with computer procedures in a more organised or swifter manner than what God has given us . Within this broader genre exist the option of High Frequency Trades. This is basically trading that is done several times in one day, Intraday traders are High Frequency Traders. Some traders trade over a thousand times a day, and it is here that you need high speed programmes to generate your trades.

The simplified process in High Frequency Trades would start from Trade generation, through trade routing till the final step of trade execution.

You may not get the trade at the price that you expect, but you would get it at the best price in the market, this explains about the dynamics of the equity markets vis-à-vis High Frequency Trades.

Here is where the high-tech dazzle comes in. The speed of trades (in exchanges) is such is that if an exchange offers space in the exchange for your server, then you have a time advantage. Thus even the time that is taken to bounce a (trade) signal off a satellite can be avoided. While this may not be a huge issue if you were to trade say just 500 or so times a day, equations change if you trade say a million times a day.

So if there are two exchanges where there is a differential in speeds then an arbitrage opportunity exists to make money. “Arbitrage opportunities exist across time and space,”

High Frequency Trades is about volumes and not margins. Basically it is about thousands of trade and the arbitrage opportunities that lie thereof. At a personal level we feel that High Frequency Trades help in improving efficiencies in markets.

But again as said, we need to use the human mind and not technology to make money here. In High Frequency Trades you trade very fast to make money, while in Algorithmic Trading you use strategy to make money. All High Frequency Trades is Algo Trading, but not all Algo Trading is High Frequency Trades.

Algo Trading is thus, a mathematical model to trade, i.e. the timing, submission and the management of trade orders. In Dubai for example this model supports some 65% of the trading activity and in India this accounts for some 20% of trading activity in the equities arena.

And just in case one felt that the Algo model resulted in volatility in the equities segment, we must not forget that this mode of trading is just a tool and that computers and their systems just obey orders that are placed by humans. Algorithmic trading is not just a facility but and aid.

So you can use the Algorithmic system either to automatically execute a trade or as a decision support mechanism. While Algorithmic trading gives you freedom to trade, it does not replace fundamental research. It only enhances trading efficiency.

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