World is getting faster. And, it’s a no brainer. We have invested racing cars, bullet trains and zooming rockets. All these are speed guns. Let’s come back to finance. Do we have a speedy trading machine that can think faster than the human mind? Yes, we do. This is exactly what we will be discussing now. It is called Algorithmic Trading.
As the name suggests, it is an algorithm or program written so as to identify and execute orders which a human brain may not be able to do. After all, we humans have limited powers. This type of programming is also called High Frequency Trading or HFT.
How does it work?
It primarily identifies arbitrage opportunities in the stock market to take advantage of the price difference within the exchanges. It is difficult for a normal human being to identify these opportunities on a consistent basis. However, this algorithm can identify such opportunities within milliseconds and also execute them.
So, if there are multiple algorithms competing with each other, what happens? Pretty simple, the fastest of the lot wins the order and executes it. For this purpose, many stock brokers have been trying to shift their base nearer to the market exchanges. The nearer they are, faster will be their execution time.
What else can be done?
Such algorithms are not just restricted to arbitrage opportunities. They are being designed to participate even in Derivatives, Forex, etc.
Which countries use it?
Currently, many countries use algorithmic trading. NYSE has the highest volume of such trades among exchanges all over the world.
What brokerages offer this service?
Brokerages in India that currently offer this service include ShareKhan, Destimoney, Zerodha, etc. Algorithm trading from all the traders combined is only one third of the trading volume in India. In US, it constitutes almost 70%.