Is Algo Trading Profitable? Shall You give it a try? What could be the potential profitability expectations you may keep – at both retail and institutional levels?
Well, let’s answer all these questions you may have in this review. But first, let’s understand some basics about algo trading.
Algo trading is a state-of-the-art technology that used computer programs called algorithms to make trades. It involves the formation of algo-trading strategies and predefining then into the algorithms to ensure that the computers become sufficient enough to execute the trades on their own, based on the strategies.
The strategies are defined based on the markets and the objectives of the traders. The extensive benefits of algo trading include high-speed trade execution, accuracy and the ability to perform the trades without the effect of human emotions. In traditional forms of trading, the traders may get affected by greed and fear and may end up taking impulsive decisions that are not profitable and lead to huge losses.
With algo trading, the trades are executed in fractions of seconds, with precision and without the effect of such human interventions.
Because of the high-end technology and the benefits, algo trading is quite profitable. Algo trading does have a lot of drawbacks like the high transaction costs, the necessity of the technical know-how, huge costs of infrastructure setup etc., however, it proves to be profitable when the profits are big enough to overcome the losses, which holds true in case of algo trading.
Therefore, the question is algo trading profitable answers itself as Yes!
Algo-Trading Profitability for the Institutional Investors
The essence of the question is algo trading profitable, varies to some extent for the institutional investors and the retail investors. For institutional investors, algo trading turns out to be extensively profitable. It is because of the fact that the institutional investors have a very large amount of capital at their disposal.
They can trade in high volumes and even if the profit per trade is less, the overall profit gets amplified due to the volumes.
The institutional investors also have access to cutting-edge technology and they have the human capital that is trained in creating algorithms and codes. Due to this reason, they are able to form effective strategies and work them out.
The institutional investors have the capability to pay for the colocation services which include placing a server at the same location as the exchange so they can get faster access to the price feeds from the exchange.
Because of this upper hand, the institutional investors are able to benefit from the low latency and they get the market information a fraction of seconds before the others and they can capitalise on it for huge profits. The institutional investors also have the ability to pay the huge transaction costs and they end up compensating their small losses with the big wins, making algo trading profitable for them.
Algo Trading Profitability for the Retail Investors
The entire premise of the question, is algo trading profitable, changes with respect to the retail investors. Although presently, there are no rules and regulations set for the retail investors to participate in algo trading, yet the retail investors are able to trade algorithmically in a profitable way.
A retail investor must be technically equipped to do exceptional coding and generate profitable strategies for winning trades, and he must have a large amount of capital as the institutional investors. This is because if the capital remains limited, they can only make a fixed number of trades and due to less volume, the profits remain limited.
At the same time, the retail investors have to keep in mind that they have to pay the transaction costs and other brokerage costs so some of the profits may get compromised, however, algo trading provides much better avenues than the traditional forms of trading. The volume of trades and the opportunities to earn profits are very high and they can be capitalised to make algo trading profitable.
Algo trading also helps retail investors to overcome human interventions and the effect of their feelings on their trades. By doing so, there are fewer chances of the retail investors making wrong trading decisions due to greed, fear or plain lack of experience.
At present, the retail investors cannot make use of colocation facility, but SEBI has issued a proposal which is being considered to allow the colocation to retail investors as well. Once that is done, the retail investors can also benefit from the low latency and make even more profits.
Therefore, as a bottom line for is algo trading profitable, it can turn out to be very profitable to the big institutional investors and the retail investors. It gives an upper hand to the investors compared to the manual forms of trading due to high speed, accuracy and minimum human intervention.
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