Systematic or algorithmic trading uses computers to identify and place trades based on predefined rules. In the case of AfriSyst, these rules are based on extensive financial research on the fundamental (or accounting). technical, liquidity and risk factors that drive future stock prices. In addition, AfriSyst will use volume prediction and trade execution algorithms to minimise market impact.
The advantage of systematic trading over normal fund management is that the algorithm taps into financial databases directly and determines trades faster than humans can. While a financial analyst could spend a number of hours analysing the company’s financial year-end accounts, a computer can do that much faster if it is preprogrammed to look for particular features. The lack of human intervention makes algorithmic trading strategies relatively cheap compared to normal fund management, both in terms of trading costs and operational costs, with the most expensive part of the process the development of the algorithm and the cost of reliable and timeous data. Algorithmic trading also avoids human errors due to manual errors or behavioral biases.
The benefit to the financial markets in which algorithmic trading occurs is that it increases liquidity which benefits all market participants.