Algorithmic trading
Also called: Algo trading · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
In algorithmic trading, or algo trading, computer programs place buy and sell orders automatically, following rules fixed in advance. These rules can cover price, timing or quantity. When the orders are placed in fractions of a second, it is called high-frequency trading. Algo trading makes markets faster and more liquid, meaning assets are easier to buy and sell quickly. But it can give an edge to those with better technology, and it can make sudden price swings bigger. SEBI has a framework that allows retail investors to use algo trading.
Example
In India's NSE co-location case, some brokers got early access to price data from the exchange's servers. Their algorithms could then trade ahead of other investors. This showed how speed can become an unfair advantage.
Don't confuse with
- Front-running: trading ahead of a big client order by using advance knowledge of it. Front-running is illegal. Algo trading is legal automation, though it can be misused.
Related concepts
- Secondary market
- Depository
- Demat account
- Clearing corporation
- T+1 settlement
- Circuit breaker
- Sensex
- Nifty 50
- Market capitalisation
- Free float