By Viraj Bhagat
Faster than a speeding trade Able to leap obstacles in a single instance Stronger than manual trading Is it a bird? Is it a plane? No! It’s Algorithmic Trading!
IntroductionFast, reliable and relentless, Algorithmic trading has taken the world by storm, it is the next step in the evolution of trading, the trading technology of tomorrow.
Fact: The Algorithmic Trading market is growing at a CAGR of 10.3% says the Global Algorithmic Trading Market Report 2016-2020. As of today, around 75% of the trades done globally are automated and Algorithmic Trading contributes a major share of it as reported by the Economic Times.
Time and again Algo Trading has had to prove its mettle to earn a place in trading in exchanges across the globe and clear many obstacles to gain acceptance from the world. This is largely due to the fact that people are reluctant to easily accept new technologies, especially those which would automate work and eliminate the use of manpower.
There are a few beliefs, disbeliefs and rumours that stop people from making the best out of Algo Trading and it is about time everyone realized its true potential.
Thus, we bring you 7 things that we believe everyone should know about Algorithmic Trading.
Did you know! There is no age barrier to train for a career in Algo Trading
People often undermine their abilities to perform and often think low of themselves wondering if they would be able to trade at a later stage in their life. Some say they are old, or they cannot cope up with the technology. But, these are just reasons if you are not willing enough to break out of that shell of old-fashioned manual trading methods.
If someone actually wants to achieve, then they need to have that will, competence, drive and the necessary skills to go ahead no matter what. Don’t let your age or your profession stop you from Trading! There are numerous examples out there, and one such success story is of this 40-year-old Quant who overcame all odds to succeed. His story inspires to just GO FOR IT!
Are you aware that there are many career and job opportunities out there for Algo Professionals?
Every role is crucial for the firm to succeed. There are various job opportunities on positions like Algo Dealer, Analysts, Data Scientists, Strategists, etc.
Programmers have taken up Algorithmic Trading and have successfully achieved some landmarks in their careers. High Frequency Trading jobs often come with higher salary packages. Many independent Traders have established their own Algorithmic Trading Desks and are reaping the benefits from the same. Learn how you too can set up your very own Trading Desk here.
Entrepreneurial ventures are a thing today, and Traders are vying to establish their own firms which have spelt success for many of them. A relative example of this is that of Derek and Maxime, finance experts from two different nationalities who helm a successful business today.
It Takes Time. Like wine, it gets better with timeIt is not advisable to pick up an Algo Trading crash course in a couple of months. Mastering Algo Trading takes years of practice and experience, your skills matter and following a structured approach is necessary, which is offered by an institute like ours. Unlike the previous practices of trading by calling out rates, broker dependency, and the carry-forward systems, today there are open systems, online trading, derivatives and algorithms. Coupled with increased governance by regulatory authorities, trading has become swift and competitive.
Trading will grow into something more fruitful and astonishing and with newer technologies like Cryptocurrency, Blockchains, Artificial Intelligence, Machine Learning, etc. who knows where it would lead us. Afterall, it is only a matter of time.
Individual Traders CAN do Algorithmic Trading
All have an equal opportunity to either make money or lose it. One often loses money due to lack of methodology, unrealistic expectations and lack of experience. It is unfair to compare large companies and hedge funds with individual traders due to the varied nature of investments and returns, and the difference reaching in millions. Big companies have a large financial backing, high spending ability on the latest technology, and other resources.
The reality is that anyone having knowledge, experience, and understanding of the markets can do Algorithmic Trading even if they are not associated with any firm. Many traders have resorted to Algo Trading and there exist countless success stories that are an inspiration to many other individuals. Instead of blindly believing or assuming that only big companies can do Algo Trading, it is always better to know the facts! Won’t you agree?
Algo Trading and High Frequency Trading are NOT the same
Algorithmic Trading is an automated system of trading which uses advanced mathematical models and formulas, pre-programmed trading instructions, and complex algorithms to make high-speed decisions and transactions for executing large orders in the financial markets. Here, the trades are placed based on defined criteria. They’re carved up into smaller lots so that the price of the stock or asset isn't impacted significantly. It thus controls execution costs and market risk.
High Frequency Trading (HFT) refers to computerized trading using proprietary algorithms to analyze multiple markets and execute a large number of orders based on market conditions. It is an extreme version of Algorithmic Trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. During the times of high volatility in the market, HFT exploits short-lived opportunities. Huge investments are required to introduce this technology.
In a nutshell, HFT is a subset of Algorithmic Trading.
Time and Latency are the Deciding Factors
Time and Latency spell the difference between success and failure, between profit and loss. Trading is a time-sensitive ecosystem but the distance is equally important. Algorithmic trading helps react to market events faster than the competition to increase the profitability of trades.
Colocation is one such solution. Traders can colocate their servers to the exchanges, i.e. Trading engines are physically close to the exchanges, even in the same building as the exchange where its computer servers are located. This drastically reduces the qualms regarding both Time and Distance. Several routers, switches, cable, and protocol changes are done to reduce latency, while R&D on new technologies are ongoing eg. Wireless data transmission, Low Data Rates, etc.
Who says you need huge capital for Trading?
It is not the number of trades done, but the way in which you trade, the strategies you use, your experience and your skills. Likely, it is often not the equipment you use or the expenses you incur to upgrade your machinery. With the proper set of skills, knowledge and tools, and right guidance you can procure the best equipment suited for your needs instead of spending wildly on non-essential, less utilizable, expensive equipment.
Often people trade on-the-go by letting their algorithms speak for them. Why can’t you?
The stories of some successful traders establish the fact that gaining skills and knowledge about trading, by being a part of some amazing courses out there (like that of the Executive Programme in Algorithmic Trading) make all the difference in the world.
Next Step:Trading exhibits some promising potential growth for the times to come. Various businesses have sprouted around Algo Trading and have been accepted by the vast trader community. There are probably many questions about algorithmic trading that you might have. We all do.
All it takes is someone to listen to your thoughts & ideas, to address your queries and show you the right path based on your aims and goals. Learn various aspects of Algorithmic Trading and join our strong base of leading alumni and connect with our global faculty. Mentors are the best source of experience and Alumni for honest feedback.
Check out the Executive Programme in Algorithmic Trading (EPAT®) that equips you with the required skill sets to be a successful trader via training modules like Statistics & Econometrics, Financial Computing & Technology, and Algorithmic & Quantitative Trading. Enroll now!