RE: Small Trades - Destitute Broker14 Jan 2020 14:20
Advantages and Disadvantages of Algorithmic Trading
Algorithmic trading is mainly used by institutional investors and big brokerage houses to cut down on costs associated with trading. According to research, algorithmic trading is especially beneficial for large order sizes that may comprise as much as 10% of overall trading volume. Typically market makers use algorithmic trades to create liquidity.
Algorithmic trading also allows for faster and easier execution of orders, making it attractive for exchanges. In turn, this means that traders and investors can quickly book profits off small changes in price. The scalping trading strategy commonly employs algorithms because it involves rapid buying and selling of securities at small price increments.
The speed of order execution, an advantage in ordinary circumstances, can become a problem when several orders are executed simultaneously without human intervention. The flash crash of 2010 has been blamed on algorithmic trading.
Another disadvantage of algorithmic trades is that liquidity, which is created through rapid buy and sell orders, can disappear in a moment, eliminating the change for traders to profit off price changes. It can also lead to instant loss of liquidity. Research has uncovered that algorithmic trading was a major factor in causing a loss of liquidity in currency markets after the Swiss franc discontinued its Euro peg in 2015.