By Jack Hughes, Contributing Writer
Algorithmic trading is the act of using code to initiate a position, such as buying or selling, in a particular asset, like a stock. According to the Merriam-Webster website, an algorithm is a step-by-step procedure for solving a problem or accomplishing some end. People use algorithms all of the time without realizing it. People use algorithms when they make peanut butter and jelly sandwiches, write term papers or calculate Microsoft Excel formulas. Algorithms are everywhere, and they shouldn’t be seen as scary.
An algorithm, in a financial trading sense, is the code to model a real-world trading strategy. Think of it as a detailed plan. Most coding nowadays revolves around digitally modeling real-world objects or actions.
Trading formulas can be exceptionally simple, such as simply holding a stock indefinitely. This is more of a strategy, but it can be represented as a strategy in code. Formulas can also be exceedingly complex with the use of Neural Networks and predictive modeling, which try to think like humans and do so at unimaginable speeds.
Algorithms can be great, but they can be problematic. They can cause flash crashes, which are sudden drops and recoveries in the stock market. These are becoming more frequent as we progress into this new, data-driven market.
People in business fields, particularly finance, should be learning about algorithmic trading now before it grows into an even bigger, more important aspect of financial markets. According to a video released by the Wall Street Journal, this new advancement in technology is going to eliminate hundreds of thousands of jobs by 2025. It will also create new ones in a different field, but those requiring traditional skills will no longer exist.
It is easier than ever to get involved with Algorithmic trading. There is a free platform called Quantopian that provides users with a beginning environment from which they can develop simple algorithmic programs. And, as they learn, they can even be paid by the company for writing well-developed code.
Using computers to make trades may not raise as much concern as it used to, but the thought that a finance degree provides diminishing job security may raise some eyebrows.
