Why are Traders Cautious About the Highly Popular Algo Trading?

Why are Traders Cautious About the Highly Popular Algo Trading?

By Capital Markets CIO Outlook | Thursday, December 19, 2019

The perception about algo trading has improved vastly, but traders still take a cautious stand while adopting it.

FREMONT, CA: The traditional set of apprehensions related to algorithmic trading has been systematically allayed. However, a complete sense of confidence is yet to sink in. According to market reports, the global market for algo trading is expected to see a CAGR above 10 percent. But this does not highlight the fact that traders and prospective users looking to adopt algo trading are still trying to ascertain the viability of the advanced trading methodology. Understanding the concerns that traders have can pave the way for innovations and optimizations in the use of technology to make algo trading highly relevant and effective.  

Different segments in the capital markets have responded differently to algorithmic trading. While certain segments like hedge funds have readily incorporated algo trading, many other segments have found it challenging to shift. Some of the factors that have impacted algo trading adoption are listed below.

  • Evolving Artificial Intelligence

With the rapid evolution of AI, algo trading is seeing ceaseless developments. Trading speeds are higher than ever, and trading decisions are being taken by machines with cognitive capabilities. Although advantageous, many traders are yet to come to terms with the changes in decision-making. There are fears about the predictability as well. With the markets already witnessing rapid fluctuations, traders are wary that algorithmic approaches could make markets more volatile than ever.

  • The Cost Factor

For smaller traders, the cost has always been an underlying factor in technology adoption. The same is valid when it comes to algorithmic trading. Smaller firms and individual investors are finding it difficult to make algo trading a financially feasible option. However, for larger firms, algo trading has been highly advantageous. As the costs of algo trading solutions fall in the near future, traders can easily embrace and utilize them.

  • The Possibilities of Frauds

dvanced technologies are highly exposed to various kinds of fraud. In the capital markets, scams have created a lot of nuisance. As algo trading depends on algorithms, there are chances of discrepancies creeping into the programs and endangering trading data. Traders can allay data security fears by using the strategy of scrutiny and appropriate safety measures.

Before committing to algo trading, traders can systematically uproot the pain points to get the best out of their investment in the technology.

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