Algorithmic trading is a new mechanism that enables the investor to trade tools and software that are mathematically backed and sound in exploring new trade methodology with human involvement close to minimal. It helps in spotting the correct and appropriate trade strategy and also helps in making the least human effort possible.
Algorithmic trading is also popular by the terms of algo trading, black box trading, etc.
Some of the most basic terms used are in Algorithmic trading are-
#1. Trend following is a tool that is often used in algo trading which analyzes various trends in market which are generally short-term, medium-term and long term. Then based on these trends, makes rational investment decision on a particular stock. The strategy advantage is it takes investment decisions on various kind of trends and it helps in making profits.
#2. Direct market access (DMA) is a tool which gives direct access to the investor to view where his money is going and the broker has the authority to give direct access to his client. Here the client have straight access to the brokers screen.
#3. Market-making: High Frequency Trading firms especially have thrived as market makers in securities markets. This means that they stand ready to buy and sell securities using their own money in order to keep the market liquid and in order.
#4. Arbitrage Strategy: An arbitrage strategy refers to the trading opportunity that exists due to price differential in various stock markets, for example, buying an instrument in one market and simultaneously selling a similar instrument in another market and thereby making profit.
#5. Low Latency Trading: Low-latency traders depend on ultra-low latency networks. They provide information to their counterpart traders much faster and in an efficient manner than the respective competitors in order to make money in micro seconds. Enhanced advances in speed has led to the need for firms to have a real-time, collocated trading platform to benefit from implementing high-frequency strategies.
#6. Spread: The spread refers to difference between the bid ask spread which is known as the cost of trading. The difference of price in which you buy is the profit or loss for the trader who is looking to make a profit on the margin of bid-ask spread.
#7. Volume Weighted Average Price: This is widely used due to its randomness which follows the past historical trend of the market in order to place the order which is close and the nearest to Volume Average Weighted Price (VWAP).
#8. Target Close: The Target Close strategy manages the market impact of the order on the closing price by defining the strategy’s optimal start time based on past trading trend and the prevailing stock market conditions.
#9. Dark pools: Dark pools are trading systems where there is no pre trade transparency of orders in the system that is no price is shown in the system and also the volumes are not revealed. Dark pools can be split into two types which is crossing networks and trading venues which are regulated markets for example MTF’s.
#10. Trading volume: The traded volume of a security in a given period of time is a quite important measure for the liquidity of a security. Trading volume in the trading period is of importance and has to be forecast. Therefore, empirical studies of trading volume are necessary.
#11. High frequency trading: High frequency refers to the kind of electronic trading tool or engine that is often characterised by holding positions very briefly in order to take advantage of short term opportunities in terms of price rise and price fall.
Ankit is a financial markets expert, having worked in financial markets for more than 11 years. He regularly writes at www.FinMarketGuru.com which is the fastest growing platform for latest financial markets updates from across the world.