Algorithmic trading

From Wikipedia, the free encyclopedia

In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading, or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on certain aspects of the order such as the timing, price, or even the final quantity of the order. Algorithmic Trading is widely used by hedge funds, pension funds, mutual funds, and other institutional traders to generate and execute orders automatically, in this context algorithmic trading can be classified between buy side and sell side institutions [1]. In sell side algo trading (brokerages) large trades are divided into several smaller trades in order to manage market impact, opportunity cost and risk.[2]. In contrast to that hedge funds do buy side algo trading. Here computers make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information.

Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following). The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically ("on auto-pilot").