Online algo trading is one of the most wide-spread trading ways in the developed markets over the last ten years. Moreover, it keeps spreading in the developing economies.
Algo trading online means transforming the idea of trading into a trading strategy with the help of an algorithm. Once such an algorithmic trading strategy is created, it can be backtested with the aim of testing whether it is able to give expected returns in the real market. The backtesting is done through historical data.
The good news is that online algo trading can be executed either automatically or manually. Algorithmic trading at home estimated to account for 20% of hedge funds allows traders understanding how to deal with funds and manage for risks.
Algo trading online facilitates making transaction decisions in the financial markets thanks to advanced math tools.
This way of trading is especially helpful when you have no necessary skills and experience, while it minimizes the intervention of a human trader and makes the decisions quick. Algo trading makes it possible to enjoy the benefits of any profit-making opportunities of the market before a human trader can even think of them.
However, online algo trading is not only helpful for the beginners, but large institutional investors also use it while they deal with tons of shares.
This way of trading is implemented through the use of mathematical formulas, which are run by powerful computers. In mathematics, an algorithm means a set of directions to solve the problem. An algebraic equation along with the formal algebra rules is a good example of an algorithm. Using just these two elements, a computer is able to derive the answer to the same equation every time.
Algo trading online enables using complex formulas and mathematical models to buy/sell financial securities on the exchange. Algo traders often use the high-frequency trading option which allows a company implementing tens of thousands of trades per second.
Algo trading breakthrough
The roots of algo trading go to American fin markets in the 1970’s. The New York Stock Exchange introduced its DOT or Designated Order Turnaround in 1976, which allowed routing orders from traders to the exchange floor specialists. But progress didn’t stand still and exchanges improved their abilities to accept electronic trading. Already by 2010 60% of the total amount of trades was implemented by computers.
Flash Boys is the book by Michael Lewis, which introduced algo trading to the world. The book documented the Wall Street traders’ life. Those traders and entrepreneurs created companies defining the structure of electronic trading in the States.
The practice of the so-called do-it-yourself algo trading online became really wide-spread in the recent years. Some hedge funds crowdsource algorithms created by some non-professional programmers who compete in winning commissions for writing the most profitable codes. Such platforms serve average traders who would love to try their luck in algo trading.
Moreover, the artificial intelligence innovations enable programmers to develop programs, improving themselves via deep learning. Traders themselves develop algorithms relying on deep learning and gain profit.
In other words, before, the system operator had to find arbitrage opportunities manually, by entering an order. But before he put the order, he could already lose the arbitrage opportunity, while orders are implemented in nanoseconds.
For that reason, algo trading online was developed, not to lose the opportunities. The software is connected directly to the system of the stock market. All you have to do is to put the amount and the expected return (for example, 4% over 30 days). The computer will find the arbitrage opportunities in the stock market and will execute orders on your behalf based on your criteria.