What Is The Basic Concept Of Algorithm Trading?

Algorithm trading is automated
trading that is based on pre-defined strategies to place the trade. The user
will be able to maintain speed and accuracy in trading and can maintain a large
volume of trading to generate profits. The basic sets of commands depend on
timing, quantity, price, or other mathematical models. Besides enhancing the
profit Algorithm trading generates more liquid and helps the user to trade in a
more systematic way by excluding all emotional quotients. Algo trading is a
system that automates the market and this concept is very new in India though
it is used for more than 10 years in other countries all around the globe.• Benefits of Algorithm Trading
for the users in the capital marketAlgorithm trading is used all
around the world for more than a decade, but the concept is new in India and
there are a lot of eminent broking houses who are efficiently using this
methodology to deal with large volumes in a less amount of time. There are a
lot of benefits that Algorithm Trading
brings with the concept and practice..Trades are carried out at the
best possible prices..Trades are timed rights and
instantly to avoid price changes..The order placement in trade is
instant and accurate. .One will be able to keep a check
on multiple markets..Reduce the transaction cost
because the system is fully automated..Algorithm Trading can back-test
by using the available historic and real-time data..This automated system will
reduce the chance of mistakes that used to happen in manual trading which is
predominantly based on the emotional ground.• Significant Risks/Disadvantages
of Algorithm tradingDue to Algo trading, high-frequency
trading systems may collapse which will hurt the financial system as a whole.
Since this type of trading mechanism deals with multiple markets, a collapse
will create inner shocks across the market which will intensify high risk..Ripple effect – Algo trading is
functional in multiple markets so any small to big collapse in the capital
trading will create intense inner shock creating a ripple effect..Volatility is increasing – Due
to the increase in algorithm trading in the market, it is outsmarting the
competitors. It reacts in the real-time market which leads to widening the
bid-ask during the volatile market. This will reduce liquidity and increase
volatility..Unreliability - Extreme market
instability is a significant contributor to algorithmic trading, which will
raise the users’ concerns in the short term and will damage the consumer’s
confidence. When a market crashes unexpectedly, investors are left perplexed
due to suchradical change..Other major risks – Algo trading
is controversial with regulators, finance experts, and academic people. The
traders who follow this mechanism never keep their portfolios overnight. The
risk-reward ratio is very high in the case of Algorithm Trading.Conclusion:Algorithm
trading is dominating the world for the last 10 years and is making the
trading mechanism fully automated. With the use of this mechanism, the traders
are able to profit even at a very less price.