The advent of technology in the last two decades, has taken over several aspects of the way financial markets operate.
Code controls the movement of more than 80% of the trades in U.S. Equities exchanges alone.
Algorithmic trading (automated trading, black-box trading or simply algo-trading)
is the usage of computer programs defined by a set of instructions for placing a trade. algorithms are capable of generating profits at a speed and frequency that is impossible for a human trader.
The majority of algorithmic trading activity is high frequency trading (HFT), which place large number of orders at very fast speeds across multiple markets and decision parameters.
They come at a much cheaper cost, higher efficiency gains and some noteworthy caveats.
These algorithms could be operating over your investment portfolio or a 401K/retirement savings plan right now.
Which is why there is a necessity to examine the caveats relating to their operation; this explainer makes an attempt to tackle that in an easily digestible manner.