Algorithmic Trading: Boosting Business Computations

Capital Markets CIO Outlook | Wednesday, May 29, 2019

FREMONT, CA: Although it may not be realized, the sophisticated algorithms already dominate our daily lives through traffic lights, train schedules, Facebook newsfeed, and more. The stock market is an area of algorithmic dominance which often goes unnoticed. These trading algorithms reshape Wall Street's way of trading. Investors use trading algorithms to make financial markets more efficient and at the same time, push us into the uncharted economic territory. Since computing power has expanded, it is no surprise that the rising tide of technology has brought a revolutionary new way of trading in the form of algorithmic and quantitative trading.

The main advantage of algorithmic trading is that it can passively enter and exit positions at a speed and frequency that cannot be done alone by a regular trader. The rate of execution of the trade, allowing traders to obtain the best possible prices by avoiding significant value fluctuations, lowered transaction costs, and risk reduction of human error could be other benefits offered by algo-trading. High-frequency trading (HFT) has become the technology's most widespread use over the past decade, particularly among large financial institutions.

One of the most popularly used algorithmic trading strategies employed by traders to leverage different stock market scenarios to turn a profit is the trend following. Traders can use algorithmic trading to spot anything from moving averages and channel breakouts to price movements and other indicators such as On balance volume (OBV) technical analysis. Traders use this trend as a price confirmation tool indicating that trades can be executed to automatically buy or sell when an upward price move is considered viable or when a trend is reversed the price starts to fall.

The next common strategy that can be overloaded by the power of algorithmic trading platforms is arbitrage, which is the process of buying and buying dual-listed security from one exchange and selling it at a higher price point at the same time in another. Savvy traders can pin these opportunities for arbitration, but by developing an algorithm that can recognize price differentials across multiple markets, it can do business and generate revenue on a much larger scale. 

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