Algorithmic Trading: An Explainer

Frontiers of Computational Journalism

The what? and how ?

The hustle and bustle of a trading floor where all the activity was witnessed for decades is now mostly replaced by chunks of code. The code behind trading algorithms essentially place the buy/sell/hold orders for trades on the exchange and do so within micro-seconds, something that a human trader cannot beat. Nearly every big bank, investment firm and player in the market has adopted these algorithms now. The majority of the algorithms are curated in-house at the firms and occasionally outsources from third-party algo-trading companies who supply the technology to execute trading strategies.
These algorithms work very well in liquid markets - where there is more opportunity for trading, rather than relatively stable markets. So equities are a big hit for code, whereas bond markets are slower. Apart from profit opportunities for the trader, algorithms make markets more liquid and makes trading more systematic by ruling out the impact of human emotions on trading activities.

Efficiency Gains and High Speed is the name of the game