What Is The Basic Concept Of Algorithm Trading?

Algorithm trading is automated trading that is based on pre-defined strategies to place the trade. The user will be able to maintain speed and accuracy in trading and can maintain a large volume of trading to generate profits. The basic sets of commands depend on timing, quantity, price, or other mathematical models. Besides enhancing the profit Algorithm trading generates more liquid and helps the user to trade in a more systematic way by excluding all emotional quotients. Algo trading is a system that automates the market and this concept is very new in India though it is used for more than 10 years in other countries all around the globe.

• Benefits of Algorithm Trading for the users in the capital market

Algorithm trading is used all around the world for more than a decade, but the concept is new in India and there are a lot of eminent broking houses who are efficiently using this methodology to deal with large volumes in a less amount of time. There are a lot of benefits that Algorithm Trading brings with the concept and practice.

.Trades are carried out at the best possible prices.

.Trades are timed rights and instantly to avoid price changes.

.The order placement in trade is instant and accurate.

.One will be able to keep a check on multiple markets.

.Reduce the transaction cost because the system is fully automated.

.Algorithm Trading can back-test by using the available historic and real-time data.

.This automated system will reduce the chance of mistakes that used to happen in manual trading which is predominantly based on the emotional ground.

• Significant Risks/Disadvantages of Algorithm trading

Due to Algo trading, high-frequency trading systems may collapse which will hurt the financial system as a whole. Since this type of trading mechanism deals with multiple markets, a collapse will create inner shocks across the market which will intensify high risk.

.Ripple effect – Algo trading is functional in multiple markets so any small to big collapse in the capital trading will create intense inner shock creating a ripple effect.

.Volatility is increasing – Due to the increase in algorithm trading in the market, it is outsmarting the competitors. It reacts in the real-time market which leads to widening the bid-ask during the volatile market. This will reduce liquidity and increase volatility.

.Unreliability - Extreme market instability is a significant contributor to algorithmic trading, which will raise the users’ concerns in the short term and will damage the consumer’s confidence. When a market crashes unexpectedly, investors are left perplexed due to such radical change.

.Other major risks – Algo trading is controversial with regulators, finance experts, and academic people. The traders who follow this mechanism never keep their portfolios overnight. The risk-reward ratio is very high in the case of Algorithm Trading.

Conclusion:

Algorithm trading is dominating the world for the last 10 years and is making the trading mechanism fully automated. With the use of this mechanism, the traders are able to profit even at a very less price.