Algorithmic Trading on the ASX

I often read on stock forums traders and investors complaining about automated trading, trading robots or 'bots' manipulating the share price of a company that they are following. I also see questions such as "Why would someone buy only 10 shares? It hardly seems worthwhile" raised.

The technical term for the practice of computers trading shares automatically is ‘Algorithmic Trading’. It involves a set criteria being established and then deploying a computer to carry out trading abiding by the criteria to meet a goal such as buying or selling a certain amount of shares within a price range. One of the key advantages of algorithmic trading is it allows a party wishing to buy or sell a large volume of shares to slowly trade small parcels of shares every few minutes (or seconds) without significantly affecting the share price.

Last July the ASX undertook a review of this type of trading and has released the findings on 08/02/2010 in the report ‘Algorithmic Trading and Market Access Arrangements’. The report can be heavy going at times and full of jargon but does make interesting reading.

If I observe algorithmic trading there are some aspects that I like to take a close look at. Is the trading robot a net buyer or seller? If it is a buyer than there could be a new investor coming on to the share registry which is positive. I would keep an eye out for any new substantial shareholder notices or changes in substantial holders to identify who the party is (such as a competitor that may launch a takeover etc.). I would also monitor for how long the trading lasts.

Finally, one other thing that I use to assess trading opportunities is the ‘number of trades’ (not volume) executed on a stock. If the number of trades is increasing each day I can see that interest in that particular stock is increasing and an opportunity may be presenting itself. Should there be algorithmic trading on a stock than the number of trades is amplified substantially. I.e. there are a lot of trades but they are all tiny, the dollar value small and thus the ‘number of trades’ value is not meaningful. In this case I would progress with tracking the overall volume traded per day on the stock that I am following.