Algorithmic trading was developed to deal with :
- Decimalization in the United States and the direct effect of tick sizes (shares traded for1 cent instead of a portion of a Dollar )
- Fragmentation of liquidity that occurred early in the U.S. ( shares are traded on several markets simultaneously)
After MiFID, which allowed competition between marketplaces, so imported the algorithmic trade to Europe with the following consequences:
- Fragmentation and decreasing tick sizes have resulted in trade entries becoming redundant and abolished on some Stock Exchanges
- The depths of orders have been reduced and manual trading of shares is becoming increasingly difficult
- Venues have introduced tariffs favoring algo trading
The reduced order depths have indirectly increased the proportion of shares traded by so-called dark pools, partly as investment banks want to maintain liquidity to the extent possible rather than placing it on the venues.
The migration of volumes from the stock exchanges, the visible volume of MTFs and invisible volume in dark pools , speeds of liquidity fragmentation, and has made clear the need for algorithmic trading and Smart Order Routing in Europe .
Types of trade related to Algorithmic Trading
Algorithmic trading should not be confused with automated trading.
Automated trading is certainly always electronic, but it has no memory and no ability to decide when the user should execute or invest, instead it is entirely controlled by simple rules based on price data, or time of day.
Automated Trading can also refer to the retail trade that takes place without a broker dealing orders before they reach the market. So there is no common definition of automated trading.
Program trading involves executing a basket that holds at least 15 orders, that is, the basket can hold up to 15 different shares. A typical program is instructed by a pension fund to a trading desk to sell / buy a certain number of shares in each of the 30 companies that fit the OMX 30.
The reason for the order may be that the pension fund wants to reduce its exposure in equities and switch to bonds. Brokerage table can choose to perform the program or parts of the program with the help of execution algorithms.