In recent years the volume transacted by algorithmic trading (or algo-trading) firms has increased to such an extent that a majority of orders in the financial markets are executed automatically by algorithms. For instance, a 2019 study showed that 92% of Forex trades were made by algorithms and not manually by humans (Kissell, 2020).
Algorithmic trading is the process of using a computer program that follows a defined set of instructions for placing a trade order. Once the current market conditions match any predetermined criteria defined by the strategy model, trading algorithms can execute a buy or sell order on the investor’s behalf. Algo-trading strategies can be simple models which implement Technical Analysis or more advanced techniques which leverage Machine Learning and Artificial Intelligence.
Algo-trading is widely used by investment banks, pension funds, and hedge funds, which may need to automatically execute larger orders and improve performance while controlling risk. At an individual level, only experienced proprietary traders and quants can use algorithmic trading since it requires a solid knowledge of both trading and computer programming, software that is able to handle huge amounts of data, and an infrastructure that enables trading strategies to actively open and close positions. Less savvy investors might have issues designing their own algo-trading system, and only first-tier investors have access to algo-trading funds since entry barriers are high.
Some advantages of algo-trading:
- Simultaneous automated monitoring of multiple market conditions and use of advanced models to spot predictive paths.
- Improvement of order entry speed: since computers respond immediately to changing market conditions, automated systems are able to generate orders as soon as trade criteria are met.
- Back-test: applying trading rules to historical market data and seeing how the strategy would have performed in the past if active.
- Diversify trading to trade multiple accounts or various strategies at one time.
- Preserve discipline while trading, even in volatile markets.
- Reduced possibility of BIAS and exclude emotional/psychological factors.
Here at Mizar, we are enabling everyone to invest with algo-trading. Investors will be able to search for profitable algo-trading strategies developed by expert engineers or data scientists with MizarLabs, our open source algo-trading tools, and allocate some capital with a few clicks on our platform. The strategy will actively monitor the market, follow the instructions of the model, and place orders accordingly. The only thing the investors have to do is to connect to their exchanges, pick up a strategy, allocate some capital, sit back and let our low latency trading system do the job. The performance will be fairly split between the investor and the quants, in order to reward them for their ideas and hard work.
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