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The Algorithm Behind Algorithmic Trading: Why It Makes Sense

The Algorithm Behind Algorithmic Trading: Why It Makes Sense

excerpt from The Market Mogel July 6, 2017

Man vs. Machine

The most prominent development facilitating the change in behaviour is derived from powerful computing, high connectivity speeds and real-time intraday information. The following ingredients gave rise to high-frequency trading.

Its dominance is being manifested by increasing presence in a variety of asset-classes. As a result, a new competitor has entered the gladiator spectacle; the machine.

Due to the short time horizon of investment decision making in HFT, day traders are more likely to experience a change in the competitive landscape. Reacting to certain news or price movements is unlikely to yield trading profits as before. Algorithms react faster, by entering and unwinding positions in milliseconds.

Consequently, such rapid executions of buy/sell orders are likely to distort price signals, making it difficult to enter a particular trade by hand. A primary example of this is the recent flash crash, causing unjustified price swings.

Temporary or not, flash crashes like the one that took place in August 2015 shake the confidence of individual investors who rely on the public markets to dictate the fundamental value of a company.”

Ted Kaufman

Read the full article on The Market Mogel