Algorithmic Trading - or Algo Trading - is more than a technological breakthrough in the stock market. It is a programmed process executed on a computer, which follows a specific set of instructions (an algorithm) to perform a trading operation. The markets of the moment are the US, India, the UK, and South Korea. Accuracy, exceptional speed, and liquidity are the unique characteristics of algorithmic trading, which will result in the exponential growth of the algorithmic trading market soon.
Algorithmic and quantitative trading strategies are becoming more popular as they can increase the likelihood of success with the support of statistics and machine learning. Nearly 50% of global Forex volumes are negotiated through algorithms.
An expanding market
According to a Coherent Market Insights survey, the global algorithmic trading market was valued at $ 9 billion in 2017 with a projected growth of 10.1% pa over the forecast period (2018-2026).
Among the algorithmic applications in the financial market, the hedge funds segment is expected to show the highest growth rate until 2026. For those who do not yet know, a hedge fund is formed by the partnership between different investors, where the fund groups assets of individuals accredited or institutional investors to leverage funds and use various strategies (such as derivatives, futures, etc.) to obtain returns in various markets.
Who is using Algo Trading?
For example, in 2017 in the US, the S&P 500 index reached an accumulated high of 19.42% in three years. At the same time, the traditional fund SH Capital Partners recorded returns of 234.1%. Meanwhile, Silver8 Partners and Global Advisors Bitcoin Investment Fund reached 771% and 330.1%, respectively, based on algorithmic trading.
In addition to these two examples, funds such as Blackrock, Renaissance Technologies, Two Sigma, and others are using artificial intelligence (AI) to select the bests stocks to trade. According to the same study in 2018, about 37% of financial institutions in India have invested in technologies focused on artificial intelligence and about 68% plan to adopt it soon.
However, the US Algo Trading market was responsible for the largest slice in 2017 and will maintain its dominance over the period envisaged by the survey. This is due to the strong technological advances and to the considerable application of the trading algorithms in several verticals, like banks and financial institutions in the whole region. Algorithmic trading accounts are about 60-73% of all US stock trading, accounting for 7.5% (or $ 1.45 trillion) of the US gross domestic product.
Some of the key players in the algorithmic trading market include:
Beyond the US
It is also expected that the Asia-Pacific region will offer the greatest growth opportunities for market participants. For example, the SEBI allowed for algorithmic trading in India in April 2008 by opening up direct market access to institutions. Since then, it has grown rapidly in the various asset classes. In April 2018, SEBI announced plans for new standards to make algorithmic trading more accessible to investors.
In addition, according to QuantInsti's CXO, algorithmic trading potentially helps traders execute operations faster, expand strategic portfolios using more advanced quantitative tools, and remove human errors that often affect the performance of trading strategies.
Sources: Business Wire and Coherent Market Insights