Algorithmic trading.
In plain English
Algorithmic trading uses coded instructions to place and manage orders, ranging from a simple scheduled buy to models that react to live market data. The most common use is not speculation but execution, breaking a large order into small pieces so it does not move the price against the buyer. Common execution algorithms target a volume-weighted average price or spread an order evenly through the day. Other algorithms implement strategies, trading on statistical relationships or on signals derived from data. The technology sets the discipline in advance, but a badly specified rule executes just as reliably as a good one.
01Why it matters
Most of the volume moving prices during the day is following rules rather than reading the news, which is part of why prices can move sharply with no headline attached.
02The math, step by step
Say a fund must buy 500,000 shares of a stock that trades 2 million shares a day. A volume-weighted algorithm might buy 5,000 shares every few minutes, targeting about 25 percent of volume, so the order fills across the session instead of spiking the price at once.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is a broader category. All high-frequency trading is algorithmic, but most algorithmic trading is not fast. A pension fund's day-long execution algorithm and a microsecond market-making engine are both algorithmic and have almost nothing else in common.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice