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ALGO trading has a range of benefits over manual trading. It makes trading processes more effective by reducing labour costs and other associated costs. It also allows the analysis of large quantities of data in very short timeframes.
Fremont, CA:Algorithmic (ALGO) trading refers to trading in financial instruments where a computer algorithm (the "execution algorithm") automatically specifies the order parameters, such as when to initiate the order, the price or quantity of the order, and how to handle the order after it has been submitted.This is achieved with little to no human involvement. High-frequency trading (HFT) is a form of ALGO trading that typically involves more complexity and speed.
ALGO trading has a range of benefits over manual trading. It makes trading processes more effective by reducing labour costs and other associated costs. It also allows the analysis of large quantities of data in very short timeframes. This is particularly appealing to some modes of trading.For instance, arbitration trading requires orders to be detected and executed rapidly, as arbitrage opportunities are short-lived on the market. In addition, trading based on the detection of patterns and statistical metrics can be carried out more rapidly and more accurately by a computer.
ALGO trading has been increasing steadily since the early 2000s and is now used in some markets for about 70 percent of total orders. This growth was facilitated by technological advances, such as increased computing power, decreased storage costs and the introduction of artificial intelligence and machine learning techniques. Cost considerations, competition and profitability are primary incentives for trading using algorithms in the banking sector.
However, ALGO trading also includes risks resulting from possible failures of algorithms, IT systems and processes. In recent years, a number of significant ALGO company failures have resulted in financial damages, fines and reputation damage to credit institutions and investment firms.
These risks and the rapid growth of ALGO trading have led to increased attention being paid to the relevant supervisory and regulatory system.