The Rise of Algorithmic Trading
It’s no secret for traders that the key to having a successful portfolio is timing, discipline, and execution speed, whether you’re entering a stock or exiting them. Algorithms were initially used to handle the order of mass shares electronically since most transactions were completed on paper. This system was named the DOT and later the SuperDOT, routing orders electronically to the proper trading post. OARS (opening an automated reporting system) was created to help the specialist determine the stock’s opening price.
Once the market was integrated electronically in the 1980’s thanks to Michael Bloomberg and his team, people began getting to work on how to automate the process of buying and selling shares consistently. By the ’90s, the SEC ruled in favor of an electronic stock exchange, laying the groundwork and clearing algorithmic trading legality.
What is Algorithmic Trading?
Algorithmic trading is a platform that completes orders based on an algorithmic computer program that is capable of carrying out trading strategies a thousand times faster than traditional human-to-human stock trading. The algorithmic trading impetus automates and enhances some trading strategies like arbitrage, inter-market spreading, market making, and speculation.
These approaches consist of proven strategies that worked without algorithms by actual traders and were mirrored onto algorithms that learn and act faster than the human mind. Executing on the system at an enhanced rate and automating research, orders, and tracking.
In 2011 Nano trading technology was announced. A firm named Fixnetic developed a microchip that fulfills trades in nanoseconds. For those unfamiliar with just how fast that is, a nanosecond is equal to one billionth of a second. Only one year after in September, the company Dataminr launches news based trading.
- A brand new service with a 30 million dollar investment that was made to turn social media streams into actionable trading signals.
- This expedites the way we receive news, making it 54 minutes faster than conventional news coverage.
Traders reading this know the value of being first to information. The platform was able to identify several “micro-trends,” which provided clients with unique insight first. This gave you a massive advantage of deciding where to put your money next. You knew what the world was pivoting into first. Imagine being the first person to know Ford is shifting into electronic cars, or that a company worth pennies on paper is being acquired for millions of dollars.
The New Trend
This technology took the stock market by storm in 2012. Algorithmic trading was responsible for 70% of all US equity trades. IT companies began to jump on the bandwagon to compete with competitors and build the most consistent, reliable algorithms for their clients. These new creations were mainly focused on the same premise, just with faster response times.
- The 18 of the top 20 hedge funds use algorithmic trading to grow their client’s accounts.
They have advanced so much since the 70’s that now they can scour Twitter and filter out which stocks are being talked about most, and which stocks would be best to enter based on your portfolio. The creators of such enhanced technology are now referred to as quant developers.
- More than 4 Billion dollars and growing are directly handled by algorithmic trading.
Most of it comes from banks and large corporations. Studies show the general public is scared of this technology, and one could understand why. A computer handling the money I worked my whole life for? It also doesn’t help when respected celebrities such as Elon Musk, tell you their fears and worst-case scenario propositions such as world domination.
The fact of the matter is people have been getting rich off algorithms since the ’80s. Now we, as a general public, have access to sit at the same table while giving quant developers a fighting chance to compete in algorithmic trading. Making an algorithm that makes more money consistently while also minimizing losses.