FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Buzzing ALGO trading!
ALGORITHM (ALGO) or high-frequency trading (HFT) are a buzz word in the field of stock trading field. An ALGO and HFT trading can be explained as an automated trading system like a robot which takes its own decision based on the defined parameters. In such trading, the data received by the system is quicker than the ordinary traders, so it gives a time edge to the ALGO traders over other normal participants. The equity market traders couldn’t sense the actual volatility that works behind the visible screen. The ALO traders grab such a volatility opportunity to lock the trade much before it is noticeable to anybody else.
How it works?
Exchange gets a hefty fee from the ALGO traders for facilitating them a platform that allows high-frequency data exchange. The trade is executed by the computer itself because the opportunity is available only for a fraction of seconds, and it is impossible for a human being to execute sauda in that much time. It is a very effective tool for one who works in spreads or across the market because all the calculation is done by computer immediately, and trade is executed automatically. Normally, it is seen that brokers involved in HFT tries to locate its setup close to the stock exchanges to cut the data transmission time.
Risk and Problems with ALGO Trading
On 20th April 2012, the future of Infosys Ltd sunk around 20% during the early-morning trade, however it recovered quickly to its normal level but traders were shocked to see the drama. Again on the same day nifty crashed down below 6 % and recovered back from the peak of risky state. ALGO trading was blamed as a root cause for this situation. Similar incidence occurred in US market earlier, and ALGO trading was recognized as the main cause.
How ALGO Trading Helps
An ALGO trading has well defined rules under which it executes a trade so it helps in eliminating the human errors. It also increases the earning opportunities by quick response in less time. The arbitrageurs find it very difficult to recognize the price differences in the available items under same or other exchanges but ALGO trading helps to identify and execute such prospects. Due to quick trading by multiple participants, the liquidity in stocks also increases significantly. Earlier market making was done manually to reduce the gap between buyer and the seller, now this work has been taken over by such algorithms.
Some people argue that normal traders may feel cheated if they come to know that a computer has deceived them. On many occasions where profit could have been made but everything happens so fast that it’s impossible to recognize the race with computer. There is also some news about strictness on high-frequency trading due to flash crash, but it could have a negative impact on the market structure. Computers perform according to its program configuration, and there will be big mistakes if they are not checked appropriately. Surveillance system should be strengthened for better instead of barring the whole automated trading system. ALGO trading helps in providing liquidity to the market by filling the gap. Synchronization between the various markets is possible only when ALGO trading has a better market participation. The mistakes occurred in the past were results of faulty programming, but the trading structure would improve in coming years as the system gets mature.