In our globalized economy it is important to be aware of the increasing technological trends that connect us and shape the way we do business. Algorithmic trading is such a trend that is increasing and may one day reshape the entire financial industry.
Algorithmic trading is the use of a computer program in order to trade financial instruments, such as stocks and bonds. It does not involve
using a computer only to complete a transaction, but the algorithm itself sets the parameters of the trade such as the final price, quantity, and execution time. These parameters are all set based on variables put into the program. For example having a program sift through global exchanges looking for arbitrage opportunities or implementing technical trading strategies. Complex algorithms can take other factors into investment decisions such as fundamental analysis, news feeds or even weather patterns.
Today, it is being used extensively by managers for hedge funds, pension funds and mutual funds. One third of all European and American stock trades in 2006 were driven by algorithms, and that percentage is expected to increase to 50% by 2010, according to consulting firm, Aite Group LLC.
As algorithms can respond to market changes on their own, it raises the question: can algorithmic trading replace the trader? Research indicates that no, it cannot. Algorithms need to be created and managed by traders and analysts so for the time being there will always be a need for the trader. However, as there are advancements in artificial intelligence and tests being done where algorithms are writing themselves, maybe one-day algorithms will replace the trader.