March 2015

Algorithms are essentially a set of rules to be followed for the purpose of calculations, so it’s only natural that they’ve made their way into financial services. This month we take a brief look at algorithmic, or high-frequency, trading.

In the world of trading, computers can be programmed to take specific actions depending on certain parameters and market conditions. In essence, algorithms can monitor stock prices and place an order to buy or sell at a speed unable to be matched by a human. These decisions can be made instantly and more accurately by computers.

Algorithmic trading in theory should avoid any chance of human error but significant errors do occur, as we’ve seen in recent years in places such as the UK and the US. It also removes the emotion from a human-made trade which can so easily affect decisions.

There are many technical options when it comes to writing these algorithms to obtain different outcomes and avoid any fraudulent or inaccurate traing behaviour.

Algorithmic trading has been criticised for not being transparent and hiding the identity of large players but it has been widely embraced and accepted since the beginning of the century. It also features in Michael Lewis’ well-known book Flash Boys about a group of Wall Streeters who realise the market had become much less free since the GFC.

Big players in algorithmic trading include Susquehanna, GETCO, IMC Pacific, Optiver and Timber Hill.