Understanding the Role of Trading Platforms in Algorithmic Trading

In this article, we will discuss

• What is Algorithmic Trading?
• What is a Trading Platform?
• Role of Trading Platforms in Algorithmic Trading
• Conclusion
• FAQs

With changes in technology, we have seen several changes in the stock market, too. Investors are spoiled with choices for a sound trading platform. Algorithmic trading has gradually replaced the role of humans which acted as a bridge between traders and trade in the past. You no longer need to go to a physical stock exchange to enter the stock market. All you need is a robust trading app and you have access to the market, right at your fingertips.

While algorithmic trading has played a crucial role in the advancement of trading as a whole, it is actually because of different trading platforms that we have access to it. In this blog, we have discussed how a trading platform is helping to reshape the future of algorithmic trading. 

What is Algorithmic Trading?

Also known as algo trading or automated trading, it is a system of predefined rules fed into a computer-based program that allows the trading of financial assets. In simpler words, it is a set of instructions that a trading software uses to enable the buying and selling of financial securities. These securities include futures, options, stocks, currencies, and also, commodities. 

What is a Trading Platform?

A trading platform is a software system offered by different financial institutions, such as brokerages, banks, etc. to investors and traders to execute their trades. Investors can use them not only to trade financial securities but also to monitor the market and open and close their positions in just a matter of a few seconds. Depending on the broker you choose, you can find some of the best Indian trading platforms offering their services for free or at some fixed costs in return for maintaining and running your account.

Role of Trading Platforms in Algorithmic Trading

Let us now take a look at how the use of trading software is affecting algorithmic trading. 

• Integration of Algorithmic Trading

Trading platforms are built by integrating the rules of algorithmic trading to make them automated. They are the vessel through which investors across the world are able to take advantage of trading through their phones and computers. Without these platforms, the algorithm alone would not have been of much use to anyone. 

• Simplifying the Trade

Algorithmic trading is a very complex set of rules at its core. Trading platforms have made it easier for users to take advantage of it. For example, if you want to add a stop loss to your open position, you would not want to write a set of codes and rules and feed it to the software to make it happen. You might as well just miss the trade doing that. 

However, with trading softwares, all you would need to do is tap your mobile screen to add a stop loss. This is the extent to which they have simplified the implementation of algorithmic trading. 

• Different Features Put Together

Online trading allows a user to trade into different financial securities in one place. Most trading platforms allow you to trade into more than one security while using only one app. While algorithmic trading sped up the trading process and reduced the time for executing a trade, trading platforms have brought it together in one place. 

• Low-Latency

The primary purpose of automated trading is to increase the speed of trade. Hence, the best trading platforms are optimised for very low latency. It is to keep up with the speed and complexities of automated trading systems. If a trading system fails to keep up with processing high-volume data in a very minimal time, traders will end up missing out on opportunities. They will fail to open and close positions on time, fail to identify profitable stocks in advance and might end up with huge financial losses. 

• Incorporation of Trading Tools 

Trading tools like chart patterns, information on trading volume, price, and other factors of a stock play a very crucial role in shaping the decision of a trader. They assist them in making informed decisions and carefully analysing the market. While algo trading helps them to execute their trades faster, it is actually a trading platform that improves the user experience. 

Imagine how troublesome it would be to determine a stock's behaviour if the trading apps didn't have these features incorporated into them. Most traders would give up trying to find and identify different price points of a stock, mark them, and then interpret and predict the stock behaviour all on their own. 

• Streamline the Needs of a Trader

Algorithmic trading is a very vast concept, and not every trader needs everything. For example, you might be an options trader who only deals in stocks. In that case, your focus would only be on finding trading software that has an extensive range of features supporting stock options trading. Even if it has other features, it will not make much difference to you.

In this context, trading platforms have allowed users access to software that matches their needs. They don’t need to comb through the entire algorithmic trading setup to find what they are looking for. These platforms have not only segregated but also integrated features of trading to give traders the best experience possible.

Conclusion

Not just the best stock trading platform, but every trading platform is running on the programs of automated trading. In this sense, trading software and algorithmic trading are codependent on each other. 

With improvements in technology, these programs shall also improve. This, in return, will improve the functioning of different trading platforms . Hence, it's safe to say that both these components play a crucial role in defining the future for each other. An improvement in one means the advancement of the other.

FAQs

Q1. When did algorithmic trading start?

Ans. Algorithmic trading dates its origins back to the 1970s. It was during this time when NASDAQ became the first electronic stock exchange in the world. Set up in the USA, it began algorithmic trading that changed the face of the entire trading system.

Q2. What are a few disadvantages of algorithmic trading?

Ans. A few disadvantages of this system can be the reliance on past events to predict the future behaviour of the market, dependence on technology and the requirement of low latency.  The market doesn't always act like it behaved in the past, so there are always chances of a change.

Q3. How are trading platforms revolutionising the trading experience?

Ans. Trading platforms have eliminated the need for a human broker to act as a middleman for traders. These platforms come decked with real-time market data, news, advanced trading tools, charts and so much more. By using these tools, it has become easier for a trader to analyse the market and they also don't need to monitor it constantly. 

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