Algorithmic Trading and Its Implications on Capital Markets

Algorithmic trading is generally defined as using computer-generated algorithms to create and execute orders on marketplaces. Recently, such algo-trading strategies are increasingly being associated with the negative impact on capital markets – both from a technological as well as a business perspective. However, there are positive effects of algorithmic trading too – such as increased liquidity and the elimination of market inefficiencies – that far outweigh the potential negative effects. Regardless of this, algo-trading has seen increasing popularity and acceptance on most of the major global markets, demanding well thought-out strategies that actually help traders and investors make more than a reasonable return on their investments. Objective of this paper is to: a) Categorize the types of algorithmic trading and describe their implications for capital markets. b) Describe how to accommodate algorithmic trading in markets, while minimizing potential adverse effects. Discuss technology options and architectures to realize the same. c) Describe the use of special-purpose orders in the context of algorithmic trading.