Algorithmic trading is responsible for approximately 60-73% of all U.S. equity trading, according to BusinessWire. If you’re trading stocks manually, you naturally place yourself at a disadvantage; you’re competing against robots… and who do you think will win that fight? Nine times out of ten, it’s the robots.
Who Uses This Method of Trading?
You may be wondering: who runs these algorithms and who uses this method of trading? The aforementioned stats may shock you, especially if you’ve never heard the phrase “algorithmic trading” before. Hedge funds, investment firms, and other private equity trading groups all use algorithmic trading, mainly due to its decrease in costs, unrivaled speed, and increase in trading accuracy.
If you’re a little lost and don’t know what algorithmic trading is, don’t worry. To understand how this works, we must first explain how an algorithm works. An algorithm is a set of directions, usually inputted on a computer, to solve a complex problem. In basic terms, algorithmic trading, Python utilizes different algorithms to produce meaningful data, that is then used to determine whether to buy, sell, or hold during financial trades.
More often than not, when a firm utilizes algorithmic trading, they also use some form of trading technology to make thousands of trades each second. As these trades are real-time, this allows traders to maximize profit at any given moment – there are very few methods quite as accurate.
In more recent years, and especially since the 1980s, algo trading has increased in popularity, with many investors and investment firms choosing this new method of trading to increase their profit margins and see more accurate trading results. In fact, according to Toptal, hedge funds that utilize algorithmic trading have significantly outperformed their peers and counterparts since this time, all with reduced costs in comparison to regular trading. As of 2019, quantitative funds represented 31.5% of market capitalization, compared to 24.3% of human-managed funds.
The remainder of this article will discuss algorithmic trading in more detail, in particular, how it could make you more money.
What Are The benefits of Algorithmic Trading?
As mentioned beforehand, there are several benefits of algorithmic trading. However, the main benefits include:
- Cut down on associated trading costs
- Faster execution of orders
- Trades are timed perfectly
- Ability to backtest
- Quantitative strategies have dominated the market and returns
Each of these benefits will now be explained below in more detail, helping to provide you with greater insight on how exactly algorithmic trading works.
Cut down on associated trading costs
Firstly, when you use algorithmic trading, you are able to save and cut down on associated trading costs. Transaction costs are cut due to less human interaction, freeing up liquidity towards more investments. Likewise, you will also save money on fees, depending on your investment method – so it’s well worth keeping in mind.
Human interaction previously included general fees, a fundamental analysis performed by a finance manager, and the buying and selling of tra