Algorithmic Trading
You might take this as a sign that a Terminator-style dystopia is just around the corner, but robots (or at least artificially intelligent agents) are alive and well on Wall Street. These devices work by a process called algorithmic trading.
An algorithm is just a formula. As in "when a stock gets to ___, start buying it. Stop buying it when it gets to ___ and hold it until it gets to ___, then sell."
Actually, you don't need to join the anti-Skynet resistance just yet. Until the computers achieve self-awareness and become sentient, there is still a place for people in algorithmic trading.
Computers have diminished the need for people yelling at each other on the floor of the stock exchanges. But they've also increased the need for computer programmers, who don't trade themselves, but figure out how the computers should trade. These nerds mine data to find patterns in market movements, and then design algorithms to take advantage of similar situations as they come up in real time.
Related or Semi-related Video
Finance: What is a Block Trade?22 Views
Finance a la shmoop.. what is a block trade? yeah you think this was the yellow Marvin [A monopoly board]
Gardens trio bartered for the green Pennsylvania Avenue set but it's not
instead a block trade happens when a huge, you know block yes clever naming
there of shares needs to get sold think company founder just got divorced and [Man and woman sitting on a sofa]
old husband wants the dough fast she just wants to get rid of him you know
lose 185 pounds so of her 28 million shares she or rather her bank or brokers
put together a group of a half a dozen buyers who then buy the stock in a clean [Stock is dusted]
block trade there's a strange paradigm here sometimes companies shares are
thinly traded or not liquid meaning that there isn't a ton of volume every day in
the stock and large institutions wanna buy in big like to the tune of 5 million [Big institutions buy stock]
shares but if they buy 50,000 shares a day in the market well they'll likely
move the stock from say 18 bucks a share to 25 bucks a share by the time they're
done buying so sometimes supply of block trades is constrained and the trade
usually with price negotiated well beforehand goes off at a premium to
where it was regularly trading like that eighteen dollar figure maybe implies a
block trade that happens at 20 bucks the seller is usually happy because if they
dump the shares at fifty thousand a day into the market while they'd likely [Dump truck dumps stocks on the floor]
drive down the stock price to fifteen dollars or less in the process got it?
and this way they got a $2 premium above that 18 bucks 20 minus eighteen two
dollars there yeah and the institution is happy because now they own the [Institution smiling]
however many millions of shares that they own at a twenty dollar base price
instead of something likely much higher if they've gone into the market and
bought em, so that's when supply is constrained in a thinly traded low
volume in demand stock much more common as a block trade where there's a whole
lot of supply coming on board and not nearly the demand of buyers or investors
to take over the stock so it trades at a meaningful discount to whatever price it
was trading at like in the eighteen dollar a share case well maybe that
block trade happens at 17.20 or 16.50 or
thereabout so that's a block trade and here's a blockhead yeah ask your parents [Blockhead figure appears]
if you don't get the reference here...
Up Next
What is the Fast Market Rule? The fast market rule is something that is used in the U.K. to keep the market under control when any sort of crash ha...
What is the Black Scholes Model? The Black Scholes Model is used to determine the price of call options. It looks at the change in stock price over...
What is Automatic Reinvestment? Automatic reinvestment means that all of the money that investors make, “capital gains,” is reinvested into the...
What are NASDAQ and the NYSE? NYSE stands for New York Stock Exchange, and NASDAQ is more or less a component of this. The stock exchange is where...