Myths Associated with Algorithmic Trading

Capital Markets CIO Outlook | Friday, December 07, 2018

New Technologies bring some myths together with them no matter to which industry it is associated with. Trading industry is also perceiving such myths regarding the new age technology algorithmic trading also known as Algo trading. Such myths occur because of misinformation, lack of clarity and result in losses. Below is the article with a few common myths associated with algo trading has been busted.

Myth1: Algorithmic trading is same quant trading, high-frequency trading, and automated trading.

Algorithmic trading is often misunderstood with similar terms and concepts of trading. Although these are similar to each other but have their own significance.

Algorithmic Trading: In Algo trading process the trading strategies are converted into algorithms or computer code which are backtested on historical data to check if they could provide good returns.

Quantitative Trading: In Quant Trading, advanced mathematical and statistical computations along with quantitative analysis is involved to create trading strategies. Execution of these strategies can be done both manually and automatically but depends completely on investor’s strategy.

Automated Trading: In Automated trading, the executions of orders such buying and selling stocks are all taken care of even with the automated portfolio. The process also involves automated risk management.

High-Frequency Trading: High-frequency trading focuses more on the execution of orders in a very short span of time and targets minuscule profit from each trade but overall doing a vast number of trades. HFT is a subset of algo trading and is automated because of the numbers of orders processed in a very short span of time.

Myth2: It is Set and Forgets kind of Trading.

Although algo trading does most of the work on its own such as accumulating profits and saves traders time but requires supervision and monitoring. Investors should monitor their trades for any code error. Sometimes codes are not executed properly and need investors to fix them. It’s not a daily base or often occurring scenario but still has some existence and requires all trades to be monitored regularly.

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Myth3: HFT Put Retail Traders at a Loss

HFT being a subset of Algo trading lets this myth to be associated with it as well. In collocation servers of the HFT traders are in close proximity to the exchange which ensures that traders are able to update their orders to the fair price within a very short span of time. This somewhere benefits the retail traders as bid-ask spread is lowered and orders can be executed at a lower price in general.

Myth4: Algorithmic Trading Needs One to be Technical Whiz

Many believe that to be a successful trader in Algorithm Trading one must be a technical whiz or a programmer, which definitely is not true. If a trader is well versed with the trading system then there are algorithmic trading programs available in the market which could do the job. Some programs even come with trading strategies.

The upcoming and existing technologies; are for better and easier workflow. One must first understand it properly prior to believing any myth. The market already has tools and software that support the tech and make the experience much. Look for such options, explore them and then make an opinion about it.

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