Algorithmic Trading

Algorithmic Trading

An algorithm is a clearly defined step-by-step set of operations to be performed. Let’s say if you are assigned a task to drink water from a bottle, the algorithm or set of operations for that will be — to get the water bottle, open the cap, drink the water, close the cap and place the bottle at the right place. Simple. Similarly in a computer system, when you need a machine to do something for you, you explain the job clearly by setting instructions for it to execute. And that process is also called programming a computer.

Now, many of you might already know that before the electronic trading took over, the stock trading was mainly a paper-based activity. There were actual stock certificates and one needed to be physically present there to buy or sell stocks. And then there was dematerialization (DEMAT). Actual certificates were slowly being replaced by their electronic form as they could be registered or transferred electronically. It increased the fluctuations in the stock-prices because now the trading process was faster. But then with the technological developments came the next big thing — Algo Trading. Now, you can write an algorithm and instruct a computer to buy or sell stocks for you when the defined conditions are met. These programmed computers can trade at a speed and frequency that is impossible for a human trader. This process can be semi-automated or completely automated and this is why the terms automated trading and algo trading are used interchangeably but are not necessarily the same.


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