Algorithmic Trading is, in brief, computerized trading. This may not seem like a big thing, or even terribly important to your business, but it very definitely could be. The essence of the idea is that once a system of parameters is defined specifying buy/sell thresholds and conditions, an automated system can make stock sales or purchases quickly, any time of day or night when those conditions are met. It can do so without human intervention, and at speeds which human traders cannot match.
Why It Matters
There are two reasons it could be of importance to you. The first is that if you plan to invest some portion of your company's profits, or the salary you pay yourself, then you'll likely want to know more about the topic. This is simply because algorithmic trading systems are dispassionate. They don't panic. They simply wait for the conditions they're pre-programmed with to appear in the market, and execute according to those parameters. This is, or can be, a godsend, because it takes the emotion out of trading, and let's face it, if you watch some calamity unfold in the market and didn't have access to some kind of automated system, it would be hard not to panic and sell at precisely the wrong time.
The second reason it matters has to do with the fact that such systems are becoming increasingly popular. More and more people are using them, and that means that more and more of the daily trading volume is in the hands of machines executing trades faster than any human ever could.
This has macro level effects on the market in that it tends to increase volatility. If your company is publicly traded, then you know by now that your stock price is not always perfectly under your control. Sometimes, things just happen. If the market is soaring, the price of your stock will tend to rise along with the broader economy. If the market is tanking, even if your company is doing well, it will have the tendency to depress the price of your stock.
It Speeds Up Market Reactions Both Good and Bad
The same principles that impact the broader market can, of course, impact your company's stock in particular as well. One single whiff of bad news that triggers a sell order for one automated system will likely trigger sell orders for others, and in the blink of an eye, you can see your stock's price plummet.
If you have significant portions of your personal wealth tied up in your own company's stock, this can be absolutely devastating in the short run. The thing to remember though, is that the increased volatility is the new normal as more and more people adopt algorithmic trading systems, so don't be alarmed when you start seeing this happen. Understand that the price will bounce back just as quickly assuming your company's fundamentals are sound.
The presence and increased use of automated systems in trading means that it's more important than ever to keep a level head if you're not using them yourself. Don't panic, and don't let your emotions rule you.
