In stock market there are various strategies which are used by brokers to decide which share to buy and which one to sale.
First of all let me explain how trading is done in the market. In ancient days there existed a physical place where trading used to take place. There were buyers and sellers in the market and they all use to come at one place.
That was one most inconvenient way of trading. But now a days, trading is done by using two different approaches:
1) First one is that one can go to a broker and he will buy or sell shares on one’s behalf
2) The second one is to trade online.
Trading online is increasing day by day as this has made trading extremely simple. One can just sit at home and decide which share to trade on. There are various software with the help of which trading can be done. The features of these software differentiate them from one another, i.e. the different facilities they are providing to their users.
Some different features used in trading software (which are derived from general trading techniques) are:
User can buy from one seller and can sell to another. Software detects the lowest buying rate and highest selling rate of each share and show the difference between them to the user. Advantage of this functionality is that user can make decisions quickly and easily.
Buyers and sellers are given option to fix their price and quantity (benchmark) of shares and whenever that benchmark is reached shares are automatically bought and sold.
The average price of last few months/days is calculated so that user can have the knowledge that currently which company’s position is good in the market.
BSE/NSE has norms which say that there is a limit on no of shares that can be bought at one time by a person. So the advantage of using this algorithm is that the software automatically places the complete order placed by the customer, breaking it into number of smaller chunks. These orders are placed at a fixed price set by the customer.
Smart Order Routing:
Algorithm will choose price of best sellers and will offer to buyer. For e.g., there is a buyer who wants to buy 30 shares of a particular company and there are 3 sellers (seller1 -10 shares price-2000, seller2- 20 shares price-1995, seller3- 5 shares price-1990)
Market price is 2000. Now in smart order routing software will let the buyer have 5 shares from 3rd seller, 20 from 2nd seller, and 5 from 1st seller. This is known as smart order routing. (Cost Optimization)
There are various other techniques which are used by trading software some of which are basket trading, portfolio management. The techniques which are discussed above come under algorithmic trading.
I will discuss other techniques in my next post.