Algorithmic path as an investment trading strategy to optimise performance.

1.Lower transaction costs, liquidity and increasing need for predictive investment strategy to drive use of algorithmic trading .

2.Keep it secret, keep it simple - the mantra of the large institutional investors.

Algorithmic trading is most commonly used by large Institutional investors and as institutional trading environment is becoming more competitive, traders have turned to efficient algorithmic execution. The trend to adopt algorithm is driven by the need to have :

1. Control over the trading process.

2. Ability to focus on value added activities.

3. Cost control.

Investment performance is strongly related to execution costs. Trading algorithm is an effective tool which has contributed to the trading firms in reducing trading costs, creating liquidity and simplifying trading process by lowering commissions and reducing impact costs. The success of such algorithm requires considerable investments in research and development to acquire reliable quantitative forecasts of price movements and liquidity.

Liquidity is one of the biggest challenges for traders and algorithmic servers in today’s trading environment. A large number of algorithms are available in the market and it is a challenge to select the right algorithmic trading strategy. Any trading strategy to be successful in the long run should be robust against a variety of trading conditions and offer predictable price performance versus benchmark.

Increasingly clients will also demand flexibility with algorithmic parameters such as volume limits, adjustment for special trading days such as half-day trading sessions. An important point to note is that with any adaptation strategy traders need to be comfortable with the changing cost profile to ensure costs are consistent with the investment objectives.

Portfolio algorithm is emerging as a significant trend in the market and some industry experts have described the emergence of a new class of algorithmic trading for portfolios as algorithm-of -algorithms. It conveys the essence of higher intelligence controlling an array of algorithms.

In summary, the widely recognised importance of best execution has generated an increased need for algorithmic trading. Advanced econometric and optimisation tools are used by practitioners to develop more sophisticated trading strategies than just VWAP ( Volume weighted average price), allowing them to meet alternative trading needs.