SQUARE-OFF: ALGORITHMIC TRADING

INDIAN INSTITUTE OF MANAGEMENT, SHILLONG

The best trading strategy in the world won’t do you any good if you allow emotions to trump logic Algorithimic trading is a very effective and efficient trading approach The removal of human interaction and emotions from trade is the most essential element of algorithimic trading. It operates on predefined parameters, removing deviations It aids in the maintenance of discipline, which is regarded as the most crucial aspect of any trading technique. Algorithimic trading aids in the reduction of subjectivity and guarantees that decisions are made objectively.

What is Algorithimic Trading?

The technique of employing pre-programmed trading instructions to execute trade orders at rapid speed in the financial market is known as algorithimic trading. Trading software is used by investors and traders to supply trading instructions depending on time, volume, and price When the specified instructions are activated in the market, the trading program executes the investor's orders. This style of trading aims to make use of a computer's speed and processing capacity in comparison to human traders. It is commonly utilized by investment banks, pension funds, mutual funds, and hedge funds that may need to stretch out the execution of a larger order or make transactions that would be hard for humans to accomplish

History and Growth

An algorithmic trader employs cutting-edge technological advancements to get information quicker than others and then execute trading orders faster than others Surprisingly, the phenomenon of "rapid information" delivery dates back to the 17th century. Julius Reuter, the founder of Thomson Reuters, utilized telegraph lines and a flock of carrier pigeons to manage a news distribution system in the nineteenth century. The advent of the New York Stock Exchange's "designated order turnaround" system (DOT, and subsequently Super DOT) in 1976, which directed orders electronically to the correct trading post, which manually executed them, was a watershed moment in financial market computerization.

The Securities and Exchange Commission (SEC) of the United States legalized electronic exchanges in 1998, opening the door for automated High-Frequency Trading. HFT can execute transactions 1000 times quicker than humans Since then, algorithmic trading has grown in popularity The Securities and Exchange Board of India (SEBI) started algorithmic trading on April 3rd, 2008, by granting institutional clients Direct Market Access In summary, DMA enables brokers to supply its infrastructure to clients and provide them with access to the exchange trading system without their interference Initially, it was only available to institutional clients, not regular dealers.