An Introduction to Algorithmic Trading

The field of finance has undergone a face lift in the past few decades. The unprecedented rise in computing power has led to a structural shift in how Wall Street does business, particularly the field of trading. Quantitative trading, driven by algorithms, has changed the way large investors, small speculators and everyone in-between participate in the market.

Each algorithm is given instructions by programmers to find trading opportunities by scanning through data like historical prices, volatility, stock market volume or technical indicators such as support and resistance. Once coded up by an individual, the algorithm can be used within a particular brokerage website (a place where people can make trades) through an API (Application Programming Interface) that allows it to access past and real time stock market information. If it scans/analyzes a certain stock that satisfies the instructions coded to it, the algorithm enters a trade by automatically interacting with the broker it's connected to (with ZERO user discretion). This is what is formally known as systematic trading and is estimated to be responsible for over 75% of the trading volume on US stock exchanges.

With higher computing power however, comes larger barriers to entry. Trading firms have invested hundreds of millions of dollars in computer architecture to make sure their machines can execute trades faster than anybody else. The high frequency traders have dominated the marketplace in recent years and show no signs of slowing down.

Writing References:

http://www.investopedia.com/university/automated-trading-systems-using-interactive-brokers/automated-trading.asp

http://www.visualcapitalist.com/algorithms-changing-wall-street/

Image References: 

http://www.feedroll.com/wp-content/uploads/2015/08/Forex.jpg