In algorithmic trading, also known as automated, black-box, or robo trading, places orders in the financial markets with the computer algorithm deciding on certain aspects of the order such as the timing, price, or even the final quantity of the order.  Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following). The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically.

A third of all EU and US stock trades in 2006 were driven by automatic programs, or algorithms, according to Boston-based consulting firm Aite Group LLC. By 2010, that figure will reach 50 percent, according to Aite.^[2]

In 2006 at the London Stock Exchange, over 40% of all orders were entered by algo traders, with 60% predicted for 2007. American markets and equity markets generally have a higher proportion of algo trades than other markets, and estimates for 2008 range as high as an 80% proportion in some markets. Foreign exchange markets have active algo trading (about 25% of orders in 2006).^[3]

The issue with Algo trading is in the unforeseen increase in volatility that may cause the perfectly systematic order processing to go wrong - or right, but in a losing position. Many times, algo trading platforms will get caught in a fast moving market that ‘messes’ with their data input mechanism. This is a major problem with automated trading applications, that operate in that manner.

These types of trading applications require tighter operational guidelines, and closer scrutiny by a human observer, who can choose to ’shut off’ the trading program and decide to keep out of the market during such times.