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.

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.