Algorithmic trading is the automated execution of security orders based on coded instructions.
Programmers develop algorithms that respond to market conditions and carry out thousands of trades per second. They use advanced models, formulas, and loads of research to do so.
Successful algo traders require the finest technology and research, which tends to be available only at institutional investment firms and brokerage houses. Because independent traders don’t have access to the same resources, it is too risky for professionals to give up their cushy salaries to work for themselves.
Firms Have Superior Technology
Expensive programming software and strong servers are essential to algo traders’ success. These services allow for advanced modeling and coding, and can ensure the execution of thousands of trades at any moment.
Financial service firms have the capital to provide their workers with top-of-the-line software and bandwidth to configure strong algorithms and complete large scale orders.
However, it is unlikely that an independent trader can afford the same technological infrastructure to perform as well. Without the same software access, their algorithms will likely be weaker, and therefore less reliable.
Data Is Too Expensive and Scarce For Independent Traders
The biggest trading advantage is using scarce research, and lots of it, to find inefficiencies in the market to develop unique, airtight algorithms.
This info tends to be inaccessible to independent traders, primarily due to its expensive cost. A large firm, however, will pay top dollar for any advantageous info.
Even non-rare data is expensive for individual traders to access. Bloomberg Terminal, for example, will cost you $20,000 per year.
Furthermore, firms have the ability to allocate research amongst a team of employees. If you are working independently, you will have to do all of this on your own with much less information.
Although employed algo traders may find it alluring to leave their firm and trade independently, they may lack the information and technology to maintain success on their own.