Algorithm trading-a curse or boon to Capital Market for tomorrow

Algorithmic trading(AT) is widely used by investment banks, pension funds, mutual funds, and other buy-side institutional traders, to divide large trades into several smaller trades to manage market impact and risk. Capital markets today are dealing with the major issue of AT & high frequency trading which involves controversial views over its pros and cons.

This study is to evaluate the benefits and challenges involved in the capital markets for tomorrow with the increased use of the algorithmic trading. The issues & challenges included are algorithms have become such a common feature in the trading landscape that it is not at all easy for a broker to think of not offering it since it is the demand of client. It is difficult to confirm categorically whether or not the investment for developing algorithms justified the cost savings.

The paper also discusses the concerns of SEBI & RBI on the increasing number of fleeting orders. Algorithm innovation continues to offer returns for firms with the scale to absorb the costs and to reap the benefits.

Major results of the study says that algorithm trading has enabled buy-side firms to increase productivity, lower commission costs and cuts down transaction costs and by breaking large orders into smaller chunks, buy side firms conceal their orders and participate in a stock's trading volume. It also says proper mechanism in trading system can give great returns and also decrease the number of fleeting orders caused due to use of algorithm trading.