How Advantageous is Algorithmic Trading?

How Advantageous is Algorithmic Trading?

By Capital Markets CIO Outlook | Wednesday, February 12, 2020

Algo TradingFREMONT, CA: High-frequency trading (HFT) might involve an enormous number of trades each day. Some of the HFT traders buy and sell stocks several times per second. Algorithmic trading enables the traders to execute trades at lightning speed and volume that can’t be achieved manually. HFT uses algorithmic trading to automate trading processes using artificial intelligence (AI) and computer programs. According to Investor’s Business Daily, HFT traders are using algorithmic trading to move in and out of stocks at rapid speeds with the help of robust internet connections and powerful computers.

The algorithms associated with HFT dynamically control the time of sending orders to the market. Such algorithms read high-speed data feeds in real-time, identify appropriate price levels, detect trading signals, and place trade orders once they estimate a suitable opportunity. The algorithms can also identify arbitrage opportunities and place trades depending on new events, trends, and even speculation.

HFT algorithms consider two-sided order placements aimed at buying low and selling high. HFT also uses algorithmic trading to identify any pending large-size orders by sending various small-sized orders and observing the patterns and time spent in trade execution. In the case of trading opportunity, trading algorithms can capitalize on pending orders by dynamically adjusting prices to fill them and generate profits.

Investment firms are using technologies such as big data and artificial intelligence (AI) in their trading algorithms for HFT. With the availability of massive data, there is an increased range of data to differentiate between a good and a bad deal. Further, the massive data sets also imply that there is a need for high processing capability in real-time. Algorithmic trading addresses the above challenge for HFT as it leverages AI capability that is fit for high-speed processing and real-time decision-making capabilities.

Algorithmic trading offers an invaluable processing capability to the HFT traders. Thus, the future of HFT trading will be largely influenced by the developments in algorithmic trading.

Weekly Brief