How Trading Software Algorithms are Impacting Stock Market?

Algorithmic trading, also known as black-box trading, algo trading, automated trading etc generally refers to the trading method that depends on a computer program with a defined instruction set. In a theoretical approach, it is proven that these algorithmic trading methods can generate unbelievable profits for you at a speed that is next to impossible in trading manually. 

The defined set of instructions are usually dependent on factors like, current price trends, market timings, the number of stocks and other mathematical models. Besides offering enhanced profit opportunities to the investors, algorithmic trading also brings a systematic approach within the entire trading process, eliminating human emotions. Investing in the stock market has never been an easy task, it takes a lot of research to get that perfect score. Read on to know more.  

Some primary advantages of algorithmic trading

  • You will get the best possible price for your shares with this trading method.
  • You can place trade orders in an instant with the utmost accuracy and avoid significant price variations.
  • The transaction cost gets reduced.
  • You get to eliminate manual errors while placing trade orders. 
  • As an investor, you can easily backtest algorithms and confirm the viability of the trading strategy, based on the available historical data.

Different types of algorithmic trading strategies

Trend following 

Easiest out of all, where you simply need to follow the prevailing market trends, movements within channel breakouts, moving averages, price level movements, and other related technical indicators. You get to trade without relying on predictions or price forecasts. For example, 50 and 200-day moving average approach is a popular strategy out of all.


This is the most uncomplicated strategy that you should try out for sure. It merely includes purchasing a dual-listed stock at a lower price in one market and selling it at a relatively higher price in another market. This way, you can get access to the price differential as arbitrage or risk-free profit. You just need to set an algorithm, which is capable of identifying this kind of price differentials and efficiently places the orders for a risk-free profitable opportunity. 

Mean Reversion Strategy

Mean reversion strategy is basically a theoretical concept that the low and high prices of a stock are a temporary phenomenon that returns to their average value periodically. In this case, you need to set an algorithm by identifying and defining a price range of an asset. After that, your trades will be placed automatically while the asset’s price breaks in or out of the specified range.

Index Fund Rebalancing

Every Index Fund features a pre-defined rebalancing period that brings its holdings to a level according to its corresponding benchmark criteria. It is definitely a profitable opportunity for you, as you get to capitalize on expected trades before rebalancing the index funds.

Mathematical Model-based Strategies

You can even try any available proven mathematical model-based strategies for trading. For example, a Delta-neutral trading strategy will allow you to trade in a combination of underlying security and options.

Impacts of Trading Software Algorithms on the Stock Market

Impact on Volatility

In this modern era of technological advancements, you just can’t imagine going for retail trading. With the increased market volatility, fundamental investors face more difficulties entering the market. For example, you need to call your broker or other executive personal to place a buying or selling order. An HFT (High-Frequency Trader) can execute multiple orders and earn more profit within those split seconds. There are super-fast computers equipped with well-tested algorithmic trading softwares such as ECGTrade, which provides you real-time data from authorised vendors, helping you adjust to the volatile nature of the stock market. The data gets updated at a frequency of one second. The solution also works on previous history forecast facilitating quick decision making. 

Impact on Liquidity

You can expect that the use of trading software algorithms should enhance the liquidity available in the market. Though the assumption is valid in some cases, liquidity becomes more prominent when the market crashes. In case of significant crashes, like the Swiss National Bank peg removal in 2018, there was no liquidity available for the CHF, which further affected prices to fall rapidly. Many brokerage firms went bankrupt instantly at that time.

Impact on Market Crash

Trading software algorithms have a significant impact on the market crash. If you go through the historical data, you can find several examples like the market crash in 1987, the flash crash in 2010, etc, where the reason behind the stock market crash was these algorithmic trading practices. Assume everyone observes one of the most common algorithm trading strategies and chooses to implement it. Now, in case of a slight market fall, or if a sell order gets triggered to cut loss at once, prices can rapidly collapse because there will be no buyers in the market.

Final Words

Being dependent on trading software algorithms, assures significant profits at a rapid frequency. But like almost everything, they do possess both positive and negative impacts. It is always a better choice to know about the algorithm’s pros and cons before moving on with the investment part. For your reference, you can try the ECGTrade platform, which comes up with a variety of features, offering an appropriate return of investments that you had always wished for. 

2 thoughts on “How Trading Software Algorithms are Impacting Stock Market?”

  1. Thanks
    In this modern era of technological advancements, we just can’t imagine going for retail trading.
    I love this paragraph…
    It got me

  2. Trading algorithms make serious output on the stock market. You raise a good point and I have found your great content is useful


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