Algorithmic Trading

Algo-Trading

Algorithm Trading

Algorithm trading is also known as algo-trading or black-box trading. It’s a trading solution that uses coded sets of algorithms and execution strategies to submit orders to a market or exchange automatically after a technical analysis.

Benefits

Benefits of Algorithmic Trading

Better Prices

With algo-trading, trades are executed at the best possible price thanks to being instantly timed to avoid large price fluctuations.

Improved Accuracy

If a computer executes a trade instead of a person, there’s a lower likelihood of a mistake being made. The human factor often affects the levels of accuracy. Hence, when a computer algorithm is involved, precision is increased.

Increased Speed

Since algorithms are pre-written and executed automatically, the speed at which trades are carried out is significantly boosted.

Lower Transaction Costs

Thanks to traders not needing to monitor the markets as closely and execution being carried out without their involvement, their time is freed up. Thus, transaction costs are reduced and traders can engage in other activities.

Types of High-Frequency Trading Strategies

01

Market Making

Market making involves placing a limit offer to sell or a buy limit order to earn the bid-ask spread. They set their sell prices a little above the current marketplace and their buy prices a little below the market price. They then pocket the difference between the prices.

02

Statistical Arbitrage

Statistical arbitrage involves looking for discrepancies in the price between different exchanges or asset classes. These price discrepancies are temporary, and traders only turn a profit on these trades due to the ultra-rapid pace of trading.

03

Event Arbitrage

A related strategy to statistical arbitrage is event arbitrage, which uses recurring events to predict short-term responses. High-frequency traders use events to tap into the predictability and generate profits in just short amounts of time.

04

Latency Arbitrage

Latency arbitrage involves reducing the amount of latency in any transaction. Traders depend on the high speed of their networks to gain minute advantages for arbitrage in price discrepancies.

Strategies