Algorithmic Trading - How is This Done?
by Peter PattonAlgorithmic trading ( also called automated, algo, and black box trading) is a term describing the use of computer software programs to initiate trades in electronic fiscal markets based on sets of algorithms. These programs are intensely profitable to trading firms in many ways, particularly the algorithmic trading software is fed with live data and is able to research that data before a human trader is even aware that that new information is available.
There has been a massive array of algorithms developed across money markets to realize different trading methods.
One such system is basic arbitrage. In this strategy the software programs might be looking at several things including interest parity in the forex market. Another methodology is transaction cost reduction. In this the software investigates ways to break down enormous transactions into several smaller ones over time to get the best cost. Then there is market making, which is the act of offering to buy at below market price or offering to sell above market price to profit from that spread.
"Benchmarking" attempts to mimic indices' returns ; "sniffers" detect volatile and unstable markets; then naturally there are "gamers". "Gaming" is any sort of algorithmic trading that depends on the programming of other algo traders.
Irrespective of how it is being done it is a necessary tool to achieve success in today's finance market, and even if a company cannot house apparatus for these solutions an external host is a great solution in order to to actively utilize these algorithmic trading strategies.
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The Kyte Group offers algorithmic trading, services as well as forex, derivatives and options.
Article submitted Friday, June 12, 2009 & read 16 times.
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