Algorithmic Trading- Is it the New Artificial Intelligence for Investors?


Algorithmic Trading has come a long way, from reading the tick data days to being latest buzz on the trade markets. Has your firm captured the essence of this new artificial intelligence?

The black-box trading was a hush-hush scenario until a year ago, as only a few trading firms offered them to their clients.Nevertheless, today, you can receive a bevy of free algo trading. Therefore, when a firm announces the discovery of the next generation of trading platform, the financial services industry ears perk up. Here it is about interpreting newsflow the moment it is delivered from the horse’s mouth.

“A client depends on a sell-side firm to execute its order on its behalf according to certain benchmarks. But, when it comes to a strategy, the Algorithmic Trading system actually generates the orders. Some hedge funds do this.”

For level-one sell side firms, automated trading has become a crucial part of their existence. These firms employ algorithm trading as the basic strategy to gain momentum in the markets across the globe.

How does this artificial intelligence work? Algorithmic trading is standardized by Volume-weighted average price (VWAP) it divides the total value of trades by the total volume over a period. Interestingly, European-banking conglomerate UBS utilizes algo trading for its 40% clientele. Other giant corporations who are testing the unique capabilities of robo trading include JPMorgan Chase, Credit Suisse and Dresdner Kleinwort Wasserstein.

You think only brokerage firms and banking institutions are eagerly investigating the technology?

Dow Jones the financial news boffin is secretive about performing tests on the news-reading solution with several chief sell side firms. Meanwhile, Thomson Press corroborates- it is examining the concept with clients.

Despite the term “newsflow algorithm” akin to Algorithmic Trading, it is believed that the system will hold an immense value to the financial industry for order-generating strategies. The automated trading will consider newsflow amongst a wide array of information available for influence trading activities.

Volume and time are important factors considered by a simple algo trading. Conversely, complicated algorithms would allow several hundreds of real-time factors to arrive at a profitable investment decision. For instance, Credit Suisse swanks about an automated trading system that takes care of 3,000 data points every 10 seconds.

One-third of European and American stocks were driven by autopilot i.e., algorithms in 2006. In 2009, HFT firms accounted their 73% of US equity trading volume to the artificial intelligence.

NASDAQ, BATS and Direct Edge have gained a larger market share as compared to NYSE. Their success is attributed to algorithmic trading that enables them to reduce processing fees and commissions.

Thus, the development of automated trading has prompted a reduction in trade size and increased trade volume, leading to investment that is more profitable. And, profitable investments obtain a larger chunk of market share for automated brokerage and financial firms, as compared to old school of thought.

Algorithmic Trading Gaining Ground

Algorithmi_Trading_gaining ground

India is programmed to go the algorithmic trading way just like rest of the world since it helps to sidestep many ‘human errors’ that trip high volume traders adopting traditional trading methods.

The future of trading is in ‘programmed trading’ and India is heading the same way as other countries have been doing. Most of the day-traders lose money and it is estimated that 95 per cent of trading ended up in losses. While there is no assurance that by feeding the trading strategy into a computer, the success of it could be ensured, the chances of successful trading could go up. This is because many of the human weaknesses, like increasing the size of the order while smelling profit that would result in losses ultimately, will be eliminated and ‘that is the most important thing’.

No Human Emotion

The algorithmic trading is based on a programme written by an analyst or trader with parameters set earlier and it could be a jobbing programme or arbitrage trading etc. The advantage is that ‘human emotions will not play a part’ since the computer would execute the orders according to the programme.

It is a fully-automated process, no human intervention is needed and it is ‘away from sentiments’. The traders could do the trading in cash segments, F&O segment etc and the trading could be done in different scrips and there is the facility of putting stop loss too. The volume buying could be done at different price points giving the buyer the benefit of cost averaging and the buy/sell could be done in micro seconds. The high volatility the markets have been witnessing in the past six months has given greater opportunity for algorithmic trading.

While algorithmic trading facility is available in both NSE and BSE, because of the huge trading volume in NSE, more trades are taking place in that exchange. But one could buy in one exchange and sell in another. The algorithmic trading helped in improving liquidity and the traders could fix their own targets for buy or sell, which could be executed automatically.

Algorithmic trading is more suitable for trading in frontline stocks that had ample liquidity because when a sell order was generated, it should be executable. For HNIs, who have on hand a large volume of shares, they could set different price points for sale to average the selling price; and greater the market volatility, the greater is the opportunity in automated trading.