Algorithmic Trading: Usage of Computers to execute trades based on pre-defined instructions
The term Algorithmic Trading or Algo-Trading or Black-Box Trading was in news on 6 May 2015 since they triggered the two major stock indices Bombay Stock Exchange (BSE) Sensex and National Stock Exchange (NSE) Nifty to close at lowest levels since 17 December 2014.
\Algo-trading refers to those trade practices which are done by computers loaded with pre-defined instructions. In this, automated order execution engines perform trade without any human intervention when certain predefined market conditions such as indices reaching a particular level (whether in bullish or bearish conditions) are met.
Algorithmic trading is primarily used by institutional traders such as investment banks, pension funds, mutual funds, etc.
Advantages of Algo-Trading
• It helps in executing trade at a huge speed and frequency, not possible for a human trader. As a result, emotional human impacts on trading activities can be circumvented.
• It makes markets more liquid as more orders are placed in the market.
• It helps in identifying trading opportunities in a milliseconds based on the codes written by the trader ensuring that trading opportunities are not missed.
• It helps in identifying mispricing and instances of inefficiency very fast by rapidly closing in on arbitrage opportunities.
Disadvantages of Algo-Trading
• It increases the volatility in the market and stock prices by generating massive orders within few seconds.
• If erroneous programmes are allowed to run they can distort market prices to a large extent.
As per an estimate, Algorithmic trading accounts for a third of the total volume on Indian cash shares and almost half of the volume in the derivatives segment. Earlier in March 2012,the stock market regulator Security and Exchange Board of India (SEBI) issued an order saying that all the Algo-Trading orders must be routed through broker servers located in India in order to regulate them.
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When: 6 May 2015
Why: Due to Algo-Trading