To ease online trade, computer programs that can create an order and automatically submit it for exchange or to a market center have developed. That computer program is the automated trading system (ATS). It’s also called algorithmic trading.
Digital trade management networks have come up as a result of rapid advances in computer and communications technology. This is because they make use of computers and communications networks to create a replica of the traditional one-on-one exchange functions.
The program generates orders automatically founded on a set of rules using a trading strategy. In most cases, this strategy is based on input from other electro-sources, but it can also work based on technical analysis.
Automated Trading Systems Operate Under Which Mechanisms?
The auto-trading system figures out whether an order should be submitted depending on theoretical buy and sell prices and the current market price of an option. There’s also a look-up table, which stores up-to-date market prices of the underlying security. The table helps avoid calculation that may down-shift automated trading decisions. The system also uses organized messages to represent every stage between the market maker (also called quoter) and a potential seller or buyer (also named requestor).
Automated Trading System Pros and Cons
1. Pros
• Preserves Discipline: Because of the established rules and automatic execution of the trade, discipline is preserved as the trading plan is followed to the latter.
• Allows Back-testing: To back-test is to trade a rule to the historical market data to fathom the viability of the idea. Thus, back-testing allows willing traders to evaluate and tweak a trading idea, and figure out the system’s expectancy.
• Diversifies Trading: Digital trade management systems allow the user to trade multiple accounts at one time. This helps to spread risk while creating a hedge against losing positions.
2. Cons
• Prone to Uncertainties: At times, messages may not arrive on time. This may result from network failure at the communication link or the trader’s workstation thus messages may not reach their respective destinations.
• Monitoring: Due to the potential for mechanical issues, computers must be monitored to keep trading on the right track.
• Over-optimization: A scenario whereby a plan drawn on a paper perform terribly in the live market as a result of back-testing.
Finally, there are regulations in place to address risk controls that could be utilized to limit the degree of market disruptions. Also, most firms are advised to adequately equip themselves with devices that will ensure successful delivery all through.
