Algorithmic strategies
According to recent data, algorithmic trading accounts for half of the trading volume of US stocks on the stock exchange.
Today, thanks to algorithms, millions of trades are executed on the stock exchange and forex market using ready-made algorithms that can completely replace human traders.
It's worth noting that specialized programs have enabled traders to open and close orders at incredibly fast speeds, leading to the development of high-frequency trading.
The history of algorithmic trading
It's no secret that, prior to the 1970s, stock exchange trading was conducted as auctions, with crowds of traders gathering on specialized platforms, paying for a seat, and conducting their transactions virtually by word of mouth.
This development of stock exchanges and communications gradually paved the way for algorithmic trading, as more and more traders abandoned traditional floor trading in favor of remote office work.
A significant breakthrough in the development of algorithms and trading robots occurred after IBM analysts published a report in 2001 on the superiority of algorithms over humans, citing an example of how a simple strategy of providing an agent price had a significant advantage over an inexperienced trader.
It was the publication of this report, as well as the active integration of global exchanges into a single network, that gave a strong impetus to the development of this segment. It's worth noting that algorithmic trading refers to the use of algorithms and programs that have a predefined set of actions for opening and closing trades under specific conditions.
It's also worth noting that with the development of the global network, so-called high-frequency trading has begun to develop. The idea is that an algorithm receives specific data before a trader, which is used to execute trades with minimal risk.
Algorithmic strategies and their types
It's worth noting that algorithmic trading occupies the most competitive segment of the stock exchange, so in recent years, trading has resembled a battle between algorithms and technology. Companies that have conquered this segment must constantly improve and modernize their algorithms, as such intense competition leads to rapid obsolescence of robots.
For example, one company specializing in high-frequency trading lost over $400 million in just 45 minutes due to an algorithmic failure, and the thousands of orders submitted had a significant impact on the stock market, shaking confidence in the stock market due to manipulation by such companies.
Regarding strategies, they are roughly divided into:
1) Arbitrage.
By using algorithms, traders have the opportunity to conduct arbitrage operations based on correlation patterns between certain assets from the same or different segments.
Thus, having identified a certain pattern in movement, the algorithm performs arbitrage operations on the divergence or convergence of price movements, which occur with a delay of just a fraction of a second. Thus, only with the help of expert advisors and algorithms can such risk-free strategies be implemented.
2) Front-running strategies:
Many traders place their servers with algorithms near exchange buildings, which allows for maximum order execution speed and faster access to price information than other exchange participants. Thus, with the advantage of receiving information and executing orders quickly, traders build their strategies based on high-frequency trading.
3) Market maker tactics:
It's no secret that market makers are necessary to maintain liquidity on any instrument. In the forex market, this category of companies using such strategies provides enormous liquidity, while managing the market as they see fit. It's also worth noting that some companies are paid huge sums to create such liquidity on unpopular and illiquid instruments.
The development of algorithmic trading
has led to some positive changes for the average trader. These include very high liquidity on virtually all major instruments, allowing you to always open a trade at the quoted price.
Also, due to competition between these companies, spreads have narrowed considerably, which is certainly encouraging.
However, it's worth noting that large market makers sometimes abuse their leverage and attempt to manipulate the market, leading to requotes and unpredictable price movements that often trigger stop-losses. Incidentally, the phrase "crowd-busting" originated with the development of algorithmic trading.
