By Shobhit Seth Updated Aug 18, While using algorithmic tradingtraders trust their hard-earned money to their trading software. For that reason, the correct piece of computer software is essential to ensure effective and accurate execution of trade orders. On the other hand, faulty software—or one without the required features—may lead to huge losses, especially in the lightning-fast world of algorithmic trading. Whether it is the simple-yet-addictive computer game like Pac-Man or a spreadsheet that offers a huge number of functions, each program follows a specific set of instructions based on an underlying algorithm.
Key Takeaways Picking the correct software is essential in developing an algorithmic trading system. A trading algorithm is a step-by-step set of instructions that will guide buy and sell orders.
Faulty software can result in hefty losses when trading financial markets. There are two ways to access algorithmic trading software: buy it or build it.
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Ready-made algorithmic trading software usually offers free trial versions with limited functionality. Algorithmic trading is the process of using a computer program that follows a defined set of instructions for placing a trade order.
Given the advantages of higher accuracy and lightning-fast execution speed, trading activities based on computer algorithms have gained tremendous popularity. Who Uses Algorithmic Trading Software? At an individual level, experienced proprietary traders and quants use algorithmic trading.
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The software is either offered by calculation of the fair value of an option brokers or purchased from third-party providers. Quants generally have a solid knowledge of both trading and computer programming, and they develop trading software on their own. Algorithmic Trading Software: Build or Buy? There are two ways to access algorithmic trading software: build or buy. Purchasing ready-made software offers quick and timely access while building your own allows full flexibility to customize it to your needs.
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Availability of Market and Company Data All trading algorithms are designed to act on real-time market data and price quotes. Any algorithmic trading software should have a real-time market data feedas well as a company data feed. It should be available as a build-in into the system or should have a provision to easily integrate from alternate sources.
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Your software should be able to accept feeds of different formats. Another option is to go with third-party data vendors like Bloomberg and Reuters, which aggregate trade without a dealing center data from different exchanges and provide it in a uniform format to end clients.
Latency This is the most important factor for algorithm trading. Latency is the time-delay introduced in the movement of data points from one application to the other. Consider the following sequence of events.
It takes 0. Any delay could make or break your algorithmic trading venture. Latency has been reduced to microseconds, and every attempt should be made to keep it as low as possible in the trading system.
A few measures to improve latency include having direct connectivity to the exchange to get data faster by eliminating the vendor in between; improving the trading algorithm so that it takes less than 0.
Unless the software offers such customization of parameters, the trader may be constrained by the built-ins fixed functionality. Whether buying or building, trade without a dealing center trading software should have a high degree of customization and configurability.
Most trading software sold by third-party vendors offers the ability to write your own custom programs within it. This allows a trader to experiment and try any trading concept. Software that offers coding in the programming language of your choice is obviously preferred. This mandatory feature also needs to be accompanied by the availability of historical data on which the backtesting can be performed.
Integration With Trading Interface Algorithmic trading software places trades automatically based on trade without a dealing center occurrence of the desired criteria.
Understanding fees and transaction costs with various brokers is important in the planning process, especially if the trading approach uses frequent trades to attain profitability.
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This ensures scalabilityas well as integration. Platform-Independent Programming A few programming languages need dedicated platforms. While building or buying trading software, preference should be given to trading software that is platform -independent and supports platform-independent languages.
You never trade without a dealing center how your trading will evolve a few months down the line.
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It is the trader who should understand what is going on under the hood. Thoroughly backtest the approach before using real money. Where to Begin? Ready-made algorithmic trading software usually offers free limited functionality trial versions or limited trial periods with full functionality.
Explore them in full during these trials before buying anything. Do not forget to go through the available documentation in detail. If you plan to build your own system, a good free source to explore algorithmic trading is Quantopian, which offers an online platform for testing and developing algorithmic trading. The platform also offers built-in algorithmic trading software to be tested against market data.
The Bottom Line Algorithmic trading software is costly to purchase and difficult to build on your own. Purchasing ready-made software offers quick and timely access, and building your own allows full flexibility to customize it to your needs.
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