Cracking the Code: Algorithmic Trading

Algo trading, or algorithmic trading, is undoubtedly making headlines across the globe as a highly useful computer-programmed method of trading. It can earn profits at a level of accuracy and speed that is quite impossible for human traders. This method is being used extensively by institutional investors, but retail investors are still in the dark about the various complex computer programs and algorithms used in the process. 

Algorithms drive market success:

In this process, trading strategies are converted to compute codes using a particular programming language, and many trades are executed at once, in less than a second. As the trades are executed at a very high speed, the use of algorithmic trading methods is also spreading rapidly.

Consequences of Algo Trade:

However, traders need to consider some noteworthy effects of algo trading in the stock market, as given below: 

• It is paving the way for investors to use unregulated algos, creating the possibility of high price volatility and sudden market crashes. 
• Traders who are not into algo trading, are not able to predict price changes as fast as computer programs and thus, not able to adjust their strategies accordingly, resulting in losses. 
• This trading system is predefined and standardized, giving less flexibility to meet personal financial goals. 
• Overdependence on technology like computer codes and internet speed is not only making the process costly but also prone to missed opportunities for profit if trades are not executed on time. 
• It needs to follow strict rules and regulations set by stock exchanges to ensure safe trading. 
• There is no human emotion or any kind of psychological or subjective factors present in this concept. 

Algorithmic Trading - Questions to address:

So what does this mean for the market and its investors? Should algo trading be encouraged? Does it have the potential to take stock market trading to the next level, by becoming an integral part of capital market operation? Are the algorithms perfect enough to handle huge trade orders and execute them flawlessly? Is it possible for small retail investors to use this method confidently and create a fair trading environment? 

The steps mentioned below may answer the above questions: 

• Investors should conduct thorough research on the methods, assumptions, and data used to frame the algorithms, to reduce the possibility of losses in financial assets. 
• They should not blindly trust the programs and strategies used in trading with algo, but rather interpret them for better understanding and gain confidence. 
• Exchanges should train the members with the necessary skills to meet the surging demand for algorithmic trading.
• Investors who try to use unregulated algorithms for trading should be barred from doing so. 
• Traders and investors should continue using stop-loss, hedging strategies and assess their risk appetite while monitoring trades actively, even if they are automated.  
• Any new algorithms developed must be approved by the exchange, to prevent any compliance issues. 

Conclusion:

Thus, since trading with algo is a global concept, it is always a great idea to sharpen our mathematical, quantitative, and programming skills along with gaining valuable trading experiences because it is implied that this trading method has a bright future provided it is used fairly and transparently. 

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