The rapid increase in use of this technology in the field of finance can be understood if one sees its rise in the backdrop of evolution in computing speed. The rapidity at which trades are executed is phenomenal – and has contributed to increased liquidity of stocks in the financial markets. The touted advantages include lower degrees of human intervention, reduction of risks, increased liquidity, faster processing of information and greater efficiency in trading.
|High Frequency Trade as % Equity Turnover by Volume|
What makes these trading platforms score over traditional platforms is their speed to obtain and process real-time quotes, keep track of the positions and ensure that the various constraints in terms of risk profile of investors and ensuring that the trading costs are within the acceptable ranges. Algorthmic trading may involve sophisticated use of artificial intelligence to churn out constantly generated real time news from various sources to generate new buy/sell signals which can be used to simplify stock picking mechanism but it has its own trade-offs which may pose significant risks to positions held by a trader.