Algorithmic Trading
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading was developed to make use of the speed and data processing advantages that computers have over human traders. Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other institutional traders.
History of Algorithmic Trading
Algorithmic trading has been around since the 1970s when the New York Stock Exchange first introduced the Designated Order Turnaround (DOT) system. This system allowed traders to enter orders for immediate execution or to be queued in the system to be executed at a later time. This was the first step towards algorithmic trading, as it allowed traders to enter orders without having to be physically present on the trading floor.
In the 1980s, the development of the personal computer and the internet allowed for the development of more sophisticated algorithmic trading systems. These systems allowed traders to enter orders directly into the system and to have them executed automatically. This allowed traders to take advantage of market opportunities without having to be physically present on the trading floor.
Today, algorithmic trading is used by a wide variety of traders, from large institutional investors to individual retail traders. Algorithmic trading is used to take advantage of small price movements in highly liquid markets. Algorithmic trading is also used to reduce transaction costs and to minimize market impact.
Comparison Table
| Trading Method | Speed | Cost | Market Impact |
|---|---|---|---|
| Manual Trading | Slow | High | High |
| Algorithmic Trading | Fast | Low | Low |
Summary
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading was developed to make use of the speed and data processing advantages that computers have over human traders. Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other institutional traders. It is used to take advantage of small price movements in highly liquid markets and to reduce transaction costs and minimize market impact. For more information about algorithmic trading, you can visit websites such as Investopedia, Bloomberg, and Nasdaq.
See Also
- High Frequency Trading
- Quantitative Trading
- Market Making
- Dark Pools
- Automated Trading Systems
- Trading Bots
- Trading Strategies
- Technical Analysis
- Order Types
- Trading Platforms
