Man Vs. Machine - Algorithmic Trading
Trading, using the computer algorithm for deciding the order based on the timing
, quantity and price of the trade without human intervention is called algorithmic trading. This method of trading was introduced as early as the 1970s. By the 1980s this program became very popular with the traders. As the popularity grew the program also underwent many changes as per the requirement of the trader. The markets also began to become very volatile. The Algorithmic trading is widely used for the trading of mutual funds, pension plans etc. The High-Frequency Trading (HFT) is a special class of algorithm trading with the help of which the computers make decisions to initiate the orders. This is in turn based on the information that is received electronically. The advantage here is that the information reaches the computer faster than the person who is doing manual trading can even realize it. The use of algorithmic trading has changed the market structure and in particular the way the liquidity for the trading is provided.Any investment Strategy can use the Algorithmic Trading. The market making, arbitrage, speculations can also be made using the algorithmic trading. The decision to invest can be augmented at any stage using the algorithmic support. One can also operate completely on an auto-pilot mode. The High-Frequency Trading does not have any type of fundamentals or traditional analysis. They mainly depend of the speed. In the manual trading methods, the traditional ways are adopted and it depends entirely on how soon the information reaches the trader. If the trader is miles away from the market and does not have a frequent update on the market situation, then even a fraction of a second makes a difference to the trade.
The advantages and disadvantages of Man vs. Machine for trading are many. Each has its own set of pros and cons. A person waits for the right signals to enter the market and does the trading. He knows the signs of the market and seen all the phases of the market irrespective of it being good or bad. But, in todays technology driven age, not just the information but also the speed at which the information reaches the person makes a difference. The situation can be a make or a break situation within a fraction of a second. Also, a trader is playing around with the others money. So, he can either prove to be beneficial for the investors or can also be responsible for incurring heavy losses for the investor.
The machine is said to use an algorithm which is very intelligent and captures the market information real time. Hence, it becomes easy to make decisions for the trade. Also, the algorithm varies for system to system though all of them have a sound strategy for the trading. It is devoid of any emotions and makes decisions purely based on the mechanism it runs on. On the downside, the system can fail at any moment. On a very important day of the trade the system may crash leaving the investor with no options to trade. Also, as the algorithm does not have the intelligence to do what a man does i.e., predict the market based on what the emotions around are. As the system cannot capture the emotional quotient of the market it can do the predictions only based on the statistics. A machine may not always give the investor profits but a trader due to the relation he builds up with the investor may be a better option than the system.
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