Algorithmic trading is substantially used by institutional investors and big brokerage houses to cut down on costs associated with trading. According to exploration, algorithmic trading is especially salutary for large order sizes that may comprise as important as 10 of overall trading volume.
Generally request makers use algorithmic trades to produce liquidity.
Algorithmic trading also allows for faster and easier prosecution of orders, making it seductive for exchanges. In turn, this means that dealers and investors can snappily bespeak gains off small changes in price. The scalping trading strategy generally employs algorithms because it involves rapid-fire buying and selling of securities at small price supplements.
The speed of order prosecution, an advantage in ordinary circumstances, can come a problem when several orders are executed contemporaneously without mortal intervention. The flash crash of 2010 has been criticized on algorithmic trading.
Another disadvantage of algorithmic trades is that liquidity, which is created through rapid-fire steal and sell orders, can vanish in a moment, barring the chance for dealers to benefit off price changes. It can also lead to instant loss of liquidity. Research has uncovered that algorithmic trading was a major factor in causing a loss of liquidity in currency requests after the Swiss franc discontinued its Euro cut in 2015.