How Emerging Technology Turned Algorithmic Trading Into the King of Institutional Investing

The ongoing generative AI boom has brought automation technology back into the spotlight across several sectors, and for the world of institutional investing, the rise of the machines has helped to uncover plenty of opportunities in the form of algorithmic trading. 

When it comes to the technology sector in particular, artificial intelligence is a topic that’s constantly gaining traction. Its transformative ability to bring new evolutionary technologies and tools to the world of finance has helped to guide more institutions than ever towards portfolio growth, and the future appears brighter than ever as new developments in finance technology continue to show themselves. 

With this in mind, let’s take a look at the emerging technology helping to transform the algorithmic trading landscape and the advantages it can bring on an institutional level: 

Innovations in Algorithmic Trading

Algorithmic trading offers plenty of advantages for institutional traders and is renowned for its speed and efficiency. Crucially, it also empowers institutions to overcome the fallacies of human emotion in the decision-making process, helping to operate without preventable errors from clouding judgment. 

While there are plenty of options available for investors and many free options that offer some form of algorithmic coverage, for ambitious institutions that are intent on squeezing yield from high volume orders and fine slippage margins, it’s only prime services that should be considered as a viable solution. 

Through prime algorithms, it’s possible to execute orders at the best possible prices within a fraction of setting up a trade, helping to avoid slippage and ensuring that fine margins are optimized at a consistent rate. 

Leveraging Ultra High-Frequency Trading

One core component of algorithmic trading is high-frequency trading (HFT) and ultra-HFT. These tools operate as highly responsive middlemen between buyers and sellers and can help institutions make the most of marginal price discrepancies that may only exist for milliseconds. 

Ultra-HFT can flourish with computer-assisted rule-based algorithmic trading whereby dedicated programs can make key decisions instantly based on the requirements of institutions to action trades. For large-scale trading, algorithms can also split high-volume orders into many smaller orders to offer greater price advantages. 

In addition to this, algorithms have the power to schedule the dispatch of orders to the market and can tap into real-time high-speed data feeds, identify trading signals, interpret ideal price ranges, and place trade orders as soon as an opportunity appears. 

Crucially, the evolution of AI and machine learning has helped to leverage a new generation of ultra-HFT tools that can equip institutions with high-end tools that offer the ability to identify pending orders a fraction before the rest of the market, potentially facilitating more opportunities for high-scale trading yields. 

The Age of Natural Language Processing

The age of generative AI has helped to introduce natural language processing (NLP) into the algorithmic trading landscape, which can help traders create more flexible rules, goals, and conditions for models to follow. 

NLP has many uses throughout the financial landscape and can be used to great effect in analyzing factors like market sentiment across a wide range of social listening and analyst research to provide a far better-informed suite of capabilities for institutional traders. 

Utilizing the Potential of AI and ML at Scale

For many institutions, challenges lie in utilizing readily available trading data and insights. The road to creating a functional strategy that falls in line with an institution’s goals, values, and existing strategies can be complex, but it can be paved through a combination of artificial intelligence and machine learning. 

Where in the past algorithm providers held much control over the performance of their tools, AI and ML are helping to democratize the landscape by providing more adaptability for firms. 

This not only helps algorithms to become more adaptable to the needs of institutions, but can also aid them to become more suited to the specific instrument, market conditions, and available credit throughout each trade.

“AI has significantly improved the efficiency of data processing and analysis, enabling faster assessment of large datasets crucial for algo trading strategies,” explained Andrew Bradshaw, Global Head of Prime – Hedge Funds at 26 Degrees Global Markets. 

“This extends to machine learning algorithms that continuously learn from new data and optimize trading strategies for changing market conditions, all while minimizing human bias in the investment process. These advancements have led to a more dynamic approach to navigating financial markets.”

In the future, order management and execution management will become more synergized through this blend of automation tools, and the recent generative AI boom will help fuel new technical capabilities in this field for ambitious and resourceful institutions to continue building on their industry advantage. 

Responsive Algo Execution

Execution algorithms can help to optimize the performance of institutions in buying and selling securities at scale. Crucially, the industry’s best performing algo execution tools can help to leverage large orders in a manner that makes a minimal impact on price and reduces the overall cost of a trade. 

Sophisticated algorithms can operate with volume-weighted average price (VWAP) and time-weighted average price (TWAP) in mind. This means that large orders can be executed over a specific period to create a minimal market impact despite its overall scale. 

Some of the most effective algo execution tools can leverage iceberg orders, which break large orders into smaller ones to conceal their market imprint. Along with smart order routing, this can help to add value to institutional dealing desks without creating a market imbalance. 

Crucially, this can help to improve the accuracy and consistency of trades. For instance, algo executions can utilize a set of predefined rules and criteria to shape automated trades. This reduces the chances of error while remaining compliant throughout the execution process. 

Additionally, algorithmic executions can help institutions comply with geographical regulations, like the EU’s MiFID II directive, which requires investors to demonstrate the best execution when placing trades. 

Front Row Seats in the Evolution of Trading

Recent advancements in AI have helped to drive the evolution of algorithmic trading and help institutions build functional trading strategies at speed. 

Ultra HFT will spearhead the race for faster algo solutions within the landscape, as more key players hunt for the biggest profit margins by acting on the most infinitesimal windows of opportunity. 

The arrival of Ultra HFT has the potential to play into the hands of the world’s most ambitious institutions and can help multiple generations of traders reap the benefits of harnessing trading strategies built on market sentiment, rapid analysis, and a core understanding of their institutional commitments through fluent NLP levels of understanding. 

The next generation of institutional trading is underway, and it’s time for institutions to leverage the masses of data at their disposal.