Algorithmic trading is a process for executing orders utilizing automated and pre-programmed trading instructions to account for variables such as price, timing and volume. An algorithm is a set of directions for solving a problem. Computer algorithms send small portions of the full order to the market over time.
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Algorithmic trading makes use of complex formulas, combined with mathematical models and human oversight, to make decisions to buy or sell financial securities on an exchange. Algorithmic traders often make use of high-frequency trading technology, which can enable a firm to make tens
of thousands of trades per second. Algorithmic trading can be used in a wide variety of situations including order execution, arbitrage, and trend trading strategies.
- Algorithmic trading is the use of process- and rules-based algorithms to employ strategies for executing trades.
- It has grown significantly in popularity since the early 1980s and is used by institutional investors and large trading firms for a variety of purposes.
- While it provides advantages, such as faster execution time and reduced costs, algorithmic trading can also exacerbate the market’s negative tendencies by causing flash crashes and immediate loss of liquidity.
Understanding Algorithmic Trading
The use of algorithms in trading increased after computerized trading systems were introduced in Indian financial markets. NSE introduced the Algo system for routing orders from traders to specialists on the exchange floor.
In the following years, exchanges enhanced their abilities to accept electronic trading and upwards of 60 percent of all trades in the India. are executed by computers.
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