What is really an Algo Trading?
Before moving to the deep, first we need to understand the basic concept of Algo trading. Algorithmic trading or Algo trading is a predefined set of instruction based on certain technical studies in market analysis that allows the execution of small orders in the market. Simply if we say then Algo trading is just a program that enables the user to place the bulk order in the market. In market major players or we can say institutional traders or investors always place the bulk order to buy or sell the stock, but it is not always possible that required quantity of stocks is available at the same cost or price. So what they need?
They have to place the various small orders at different prices near by their required condition. Algo trading enables the major players of the stock market to place these small orders. For this the trader need not to sit in front of market screen and place the order, but the Algo itself identifies the condition and place the small slice of order.
People always have the misconception about the Algo trading that it gives the buying or selling signal, but this is not the right meaning of Algo trading. Algo trading helps to place the bulk order by placing the small slices of order on different price with same technical condition. Now there may be two or more than two technical conditions on the basis of which orders are placed. It may be volume,time, price etc.
In trading often a trader wants to buy a large quantity of stocks, but not all the orders are executed at the same time. This risk of not getting the required quantity of stocks at the same time or at the same price is always associated with the market. People always get confused between automated trading system (ATS) and Algo trading. ATS is the program that create the order and submit that order to the exchange automatically. Algo trading doesn’t mean that one will earn the profit by using to buy or sell signals but it helps to reduce the risk involved in execution of the order. So Algo trading is a good tool to place the bulk order.
So Algo trading can be one of the best options for time and effort saving in trading. It will surely very helpful for the traders, but a monitoring system will be required to control the unethical practices that can be performed with the help of this system. Ministry of finance is looking forward to manage the trading through Algo trading and asked the exchange to develop the policies for better application of Algo trading.
Written by : Sanchit Mishra (Research Analyst)