Tali Soroker is a Financial Analyst at I Know First.

The Basics of Algorithmic Trading – What You Should Know

The development of algorithmic trading

High frequency trading

Manual algorithmic trading

Algorithmic trading with I Know First

Algotrading is the name for a broad set of trading systems that use complex mathematical formulas and high-speed computer programs to determine, and act on optimal trading strategies. It was initially developed in the mid-twentieth century and has advanced on an exponential scale in the last 60 years.

In 1951, Harry Markowitz helped to design the first algorithm that could calculate the optimal investment portfolio. In the 1960s, advances in computer technology allowed for the analysis of millions of data points that are generated by the market each day. With these advancements, large trading firms started to use program trading by the 70s and 80s and signal theory became widely accepted around this time as well. In the 2000s, algotrading erupted and in 2012, computer algorithms made 84% of trades.

Algotrading can be divided into two categories, Automatic High-Frequency Trading (HFT) and Manual Algorithmic Trading. HFT is trading with the use of computers that are programmed to follow a certain set of instructions, these computers can make trades thousands of times faster than humans. When HFT erupted in the 2000s it allowed for the removal of humans almost entirely from the trading process.

HFT has revolutionized the way modern stock trades are made. A controversial method, HFT has decreased the time needed to make a stock trade from several seconds to nanoseconds. Today, just one millisecond, .001 second, accounts for $100 million in revenue per year from market trades.

This practice has, at times, been borderline catastrophic for the market, causing crashes like the “Flash Crash” of 2010 when the Dow Jones plummeted 1,000 points in just one day. Regulators are now trying to make changes to the system, in an attempt to level the playing field between man and machine and to safeguard from the effects that such trading practices can cause.

In manual algorithmic trading, a computer tracks historical data and detects market opportunities, and then it produces an output for investors to act on. Until recently, this kind of algorithmic technology was accessible primarily by large hedge funds and investment firms. Now, hedge funds and private customers make up the same percentage of manual algorithm users, both around 30%. The last 40% of users consist of family offices, bank advisors, and investment banks.

I Know First, founded in 2010, is a financial technology company that has been working to increase the number of people who have access to these trading strategies by providing daily investment forecasts based on an advanced, self-learning algorithm. The algorithm was developed to track historical data for 3,000 different markets and generate daily market predictions for stocks, commodities, ETF’s, interest rates, currencies, and world indices for the short, medium and long-term time horizons. The I Know First team is focused on providing comprehensive algorithmic solutions to its investors. Employees in each of our R&D, Operations, Analytics, and Marketing departments are dedicated to providing the best products and support to our clients while maintaining the highest level of ethical conduct and transparency.