Algorithmic Trading: Learning About the Future of Investing

Investing is no easy task, and it surely isn't everyone's cup of tea. You can make good of your investment if you have timely access to market intelligence and follow it with swift trade execution. These two moves are necessary to create wealth in the capital markets. Given the competitive edge in the market, traders need to rely on high-speed information networks for timely access to news and market data, and this is where algorithm steps in. The algorithm helps generate and execute trading decisions swiftly.

What is Algorithmic Trading?

For the uninitiated, algorithmic trading could be overwhelming and confusing. However, it is a concept that can be explained quite easily. Algorithmic trading uses a custom program to help you with the trade. You can tell the program to buy or sell at a decided price. Multiple trading firms use this technology. The primary reason for this shift towards algorithmic trading is because it provides you more control and ensures the traders never miss an opportunity in the ever-changing market.

Role of the Quants

It is believed that the rise of algorithmic trading is directly related to the increase in the number of quantitative analysts - the quants. Quants are people who have a unique background in finance, math and computer science. They can create sophisticated algorithmic tools. These individuals are the backbone of finance and hedge funds. The importance of quantitative analysts has increased multifold with the rise in the importance of algorithmic trading.

If you want to have an edge in the world of trading, it is advisable to resort to algorithmic trading since that gives you an upper hand and a greater chance of success.

Playing It Smart

Success in the world of trading comes with playing it smart. It is easy to understand that the algorithms created by the quantitative analysts are far more complicated and sophisticated than the other programs available in the market. However, it is possible to work your way through an investment market with an intelligent strategy. If you have your eye on a stock, which you believe will go up even if the rest of the economy performs badly, then you can employ your own calculations and decide to buy the stock when the S&P 500 goes below a particular percentage.

Remember that your strategy goes into action only if the S&P goes down and you don’t do anything if it goes up. This plan gives you the flexibility to build multiple strategies that can be executed automatically when particular changes occur in the market; even if you are on holiday. You have access to these moves via your cell phone. You pre-determine how your investments function, depending on the changes in the market. There are two ways to access algorithmic trading.

• Buy
• Build

While using ready-made software guarantees quick and timely access, when you build your own software, you get the right to customize it according to your needs.

When you buy algorithmic trading software, it is usually costly and may have loopholes. These, when ignored, could lead to severe losses. On the other hand, when you want to build your own software, you will need to put in a lot of time and effort and will need the required skill set to make it foolproof. Regardless of whether you buy or build your algorithmic trading software, you need to be familiar with a few basic aspects:

• Availability of Market and Company Data: The software is designed to work on real-time market data and price quotes. Hence this trading software needs to have real-time data feed. A provision needs to be made to integrate from alternate sources quickly.
• Connectivity to Various Markets: Traders work across multiple markets, and hence the software should be able to accept feed in different formats. It should also have the option to use third party vendors that aggregate market data from various exchanges.
• Functionality to Write Custom Programs: Most trading softwares use the common programming languages like Matlab, C++, JAVA, Python and Perl. The algorithmic trading software sold by third-party vendors offers the ability to write custom programs within it. This feature assists traders in experimenting with trading concepts that they develop.
• Integration with Trading Interface: The algorithmic trading software places trades automatically based on the occurrence of the desired criteria. The software has the necessary connectivity to the brokers' network for placing the trade and to the exchange to send the trade orders.
• Platform-Independent Programming: Certain programming languages like C++ need a dedicated platform for running. While building or buying an algorithmic trading software preference should be given to trading software that’s platform independent and supports languages that are platform-independent.

A lot goes into picking the right algorithmic trading software. Make sure that the software is customizable, check the number of markets it's connected to and how fast it makes trades. Some platforms, like Investfly, are designed for people without technical backgrounds. Others, like AlgoTrader, are built for people who can code and work with the more technical aspects of algorithmic trading, giving more control & flexibility.

If you want to experiment with a new strategy through the software, it is advised that you incorporate it in virtual trading and see how it performs.

Quantopian is an online platform for testing and developing algorithmic trading. Individuals can test and customize their existing algorithm or create a new one. The platform also allows algorithmic trading software to be tested against market data, to check their viability before being used in the real market.

Future of Investing: Algorithmic Trading

Modern trading and investing are constantly evolving. If you don't evolve with it, then you are at the risk of being left behind. Algorithmic trading has been used on Wall Street for the past two decades, and now the rest of the world has started using it. The biggest firms on Wall Street have used the availability of technology to make billions, and now that you have the tools, it is time to take advantage of it.

Learn the ropes of algorithmic trading and become a part of the booming future that the trade market will witness.