Tuesday, February 3, 2015

algorithmic trading

In algorithmic trades, the trader feeds a computer programme into the system and allows that program to put in all his trading orders and execute them too. These are very high speed transactions which help in securing a deal on the stock market within no time
There are many different types of algo programmes. Some of these programmes sclice the order into bits and spreads out the orders through the trading session so that the price is not unduly affected by the order.
Also some of these identifies anomalies between the price of an asset in different exchanges or markets and cashes in on these differences
These algos though harmless,can be used for underhand activities as well like bluff trades so that other programmmes reveal their intended trades.
Effects of algo trades on stock markets :
1. Market volatility : increase in thr unhedgable risk and thus a decrease in risk-adjusted returns
Ex: Flash Crash of 2010,USA
Knight capital case,2012
2. Increase in liquidity
3. These trades have an unfair advantage because they put in the trade before other investors become aware of it. Thus adversely affecting other investors .
4. Some of them also bombard the stock exchanges with multiple orders thus swamping the system
On the indian NSE these trades account for about 45% of the equity derivative market. Regulators worldwide are finding means to regulate these trades. However, they are hard to regulate as these trades have grown so big in number that they cannot be banned without causing serious harm to market’s liquidity and price discovery process.

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