Human beings can react fastest in 140 millieseconds. Algos react in microseconds i.e time measured in millionth of a second. But speed is not the only advantage. There are others, a few of which are listed below "
Execution Algorithms : To execute a large 'buy' or 'sell' order, the algo takes a large order, and breaks them into slices. It will then choose the time to send the order to the market to minimise adverse price movement.
Volume Participation Algorithms : Will calulate the no of shares that are traded in at a certain time, e.g 1 minute. It will then send a slice of its order in proportion to the quantity traded, again to avoid adverse prices movement.
VWAP Algorithms : It checks the statistical data of shares traded in the previous days at different times and releases its order accordingly.
Electronic Market Making Algorithms : Will place orders at price it will sell and lower prices at which it will buy to earn a spread. Depending on the demand / supply, it will change its order faster than you can blink.
Statistical Arbitrage Algorithms : Look for small disturbances in price patterns to make a profit. E.g if the shares are traded around a slow moving average, and a big buy or sell will cause a short term fluctuation in the average, in which case the algorithm will calculate the moving average price, and buy the quantity below the average or sell above the average so the prices will revert to mean. The advanced version of this algorithm will track the share prices of two co-related or inversely related companies and execute a pair trade looking for mean reversion.
Algo Sniffing Algorithm : These algorithms look out for trades done by other algos. E.g if it can detect the electronic buying and selling signature based on Volume Weighted Average Price, it will buy the shares ahead of the target algo, and sell it to them at a profit.
Spoofing Algorithm : This algorithm tries to outwit the Algo Sniffing Algorithm. It will buy or sell a large block of shares and then issue large follow up order just a few fractions below the current market price. Other algos and traders will see this large orders book quanity on buy or sell side, and make a trade of their own, thus driving the prices. When this is done, the Spoofing Algo will clear out of its position at a profit and cancel all other pending orders .
Execution Algorithms : To execute a large 'buy' or 'sell' order, the algo takes a large order, and breaks them into slices. It will then choose the time to send the order to the market to minimise adverse price movement.
Volume Participation Algorithms : Will calulate the no of shares that are traded in at a certain time, e.g 1 minute. It will then send a slice of its order in proportion to the quantity traded, again to avoid adverse prices movement.
VWAP Algorithms : It checks the statistical data of shares traded in the previous days at different times and releases its order accordingly.
Electronic Market Making Algorithms : Will place orders at price it will sell and lower prices at which it will buy to earn a spread. Depending on the demand / supply, it will change its order faster than you can blink.
Statistical Arbitrage Algorithms : Look for small disturbances in price patterns to make a profit. E.g if the shares are traded around a slow moving average, and a big buy or sell will cause a short term fluctuation in the average, in which case the algorithm will calculate the moving average price, and buy the quantity below the average or sell above the average so the prices will revert to mean. The advanced version of this algorithm will track the share prices of two co-related or inversely related companies and execute a pair trade looking for mean reversion.
Algo Sniffing Algorithm : These algorithms look out for trades done by other algos. E.g if it can detect the electronic buying and selling signature based on Volume Weighted Average Price, it will buy the shares ahead of the target algo, and sell it to them at a profit.
Spoofing Algorithm : This algorithm tries to outwit the Algo Sniffing Algorithm. It will buy or sell a large block of shares and then issue large follow up order just a few fractions below the current market price. Other algos and traders will see this large orders book quanity on buy or sell side, and make a trade of their own, thus driving the prices. When this is done, the Spoofing Algo will clear out of its position at a profit and cancel all other pending orders .
