ETFs, Stock Trading

What is Automated Stock Trading?

Learn All About Automated Stock Trading

Automated stock trading is simply a computerised system of stock trading, where a computer algorithm placed buys & sell orders of shares on your behalf on a stock exchange.

An automated stock trading system is a computer program that creates buy & sell orders whilst automatically submitting these orders to a stock exchange. The computer program will automatically generate orders based on a predefined set of rules using trading strategies which are usually based on technical signals, but can also be based on input from other sources such as twitter feeds, fundamental economic data or other data inputs.

What is Algorithmic Trading?

These buy & sell orders which are sent to the market by computer programmes are known as algorithmic trading or algo trading or short. These algorithmic trading programmes were first created in the 1970s, but now it is thought that more than 80% of the stock market is traded by computers via algorithmic trading.

Automated stock trading are often used with electronic trading via automated stock market exchanges and utilise electronic communication networks, “dark pools” and automated exchanges. Automated stock trading and algorithmic trading platforms can execute repetitive tasks at speeds with orders of magnitude greater than any human equivalent. In other words, you have no chance to compete with algorithmic trading systems as they can trade in milliseconds. Most automated stock trading systems however are not that quick and do not trade that frequently.

Algorithmic trading is a method of executing large orders, orders that are too large to fill in one trade, using automated pre-programmed trading instructions accounting for variables such as time, price, and volume to send small slices of the order, sometimes known as child orders, out onto the stock market over a period of time. They were developed so that traders do not need to constantly watch a stock and repeatedly send those slices out manually. Popular algorithmic trading orders include Fill or Kill, Trailing Limit Orders, Percentage of Volume, Pegged orders, Volume Weighted Average Price (VWAP), Time Weighted Average Price (TWAP), Iceberg orders and Dark Ice orders, to name just a few. Some of the newer roboadvisers can place these orders on your behalf.

You can see an explanation of Algorithmic Trading in the video below

Automated Stock Trading Video

Algorithmic trading explained

What is High Frequency Trading?

High Frequency Trading (HFT) is undertaken usually by proprietary trading firms using technology that costs millions of dollars up.

High Frequency Trading (HFT) provides liquidity to the market. In 2017, Aldridge and Krawciw estimated that in 2016 HFT on average initiated 10 – 40% of the trading volume of equity markets and 10 – 15% of the volume of foreign exchange & commodity markets. Intraday, however, the proportion of HFT can vary from 0% to 100% of the short-term trading volume. Previous estimates which reported that HFT accounted for 60–73% of all US equity trading volume, with that number falling to approximately 50% in 2012 were highly inaccurate speculative guesses.

High-frequency traders move in and out of short-term positions at high volumes and high speeds aiming to capture sometimes a fraction of a cent in profit on every trade. HFT traders are scalpers in other words.

In fact, High Frequency Trading (HFT) is so fast, that we are reaching the peak limits. A network switch made by the firm Metamako allowed a trade order to be placed in the time it takes for a photon to travel 90 feet.

Australian company Metamako’s network switch is able to route incoming information through to trading servers in just 4 nanoseconds and can lower the time it takes to execute a full trade, from the time it receives market information from a stock exchange to the time it sends out a buy or sell order, to just 85 nanoseconds. This is nearly 3 times faster than Cisco’s general-purpose networking switch.

Traditional risk controls and safeguards that relied on human judgment are not appropriate for automated trading and this has caused issues such as the Flash Crash in 2010. New controls such as trading curbs or circuit breakers have now been installed in some electronic markets to deal with automated stock trading systems.

For the average investor on the street, you won’t have access to a High Frequency Trading programme. You would need several million dollars. However, there are plenty of Business to Consumer (B2C) roboadvisers which can provide clients with automated trading systems. In 2018, you can even download free automated stock trading apps (see below).

Automated Stock Trading App

There are now many roboadvisers which offer automated stock trading. In the USA, Betterment, Wealthfront and Future Advisor lead the way with automated stock trading apps. In the UK, scalable capital have a great automated stock trading app solution For Asia and the rest of the world, The Money Pouch has smart automated stock trading strategies for beating the stock market.

Click here to learn more about automated stock trading and download the free automated stock trading app.