The term Algorithmic Trading refers to the an automated system like a computer program that is used to place trading orders with a mathematical algorithm based on the analysis of the current market trend, timing, price. It also initiates the order automatically, without any human intervention. In electronic financial markets, Algorithmic Trading is also known as Algo Trading in short, and Automated trading. High Frequency Trading is a special class of Algorithmic Trading in which the model makes elaborate decisions to generate orders based on the live feed data received from the market and at a rate that is difficult to achieve by manual means.
Algorithmic Trading is widely used by brokerage firms, high-value investors, pension funds, mutual funds, and other institutional traders, to divide large trades into several smaller trades in order to manage market impact, and risk. Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically.
The following are the areas where Algorithmic Trading is used:
· In investment strategy
· Market making
· Inter-market spread
· Arbitrage
· Pure speculation (including trend following)
The investment decision and implementation may have additional algorithmic support or may operate completely automatically.