Computer applications have made it easy to automate trading, especially for short-term intensive activities like day trading, making the usage of trading software very popular. The debate continues over the profit potential that can be realistically derived from day-trading activities, as brokerage fees and commissions are said to take away the major portion of available profit potential. It thus becomes very important to select the right day-trading software with a cost-benefit analysis, assessment of its applicability to individual trading needs and strategies, as well as the features and functions you need. 

Day trading is a time-bound trading activity where buy or sell positions are taken and closed on the same trading day with an aim to make profits in smaller price differentials on large order volumes by frequent buying and selling, usually on leverage

What Is Day-Trading Software?

Day-trading software is an automated computer program, usually provided by brokerage firms, to help clients carry out their day-trading activities in an efficient and timely manner. They enable traders to reap profits that would be difficult to achieve by mere mortals. For example, a day trader may find it impossible to manually track two technical indicators (like 50- and 200-day moving averages) on three different stocks of his or her choice, but an automated day-trading software can easily do it and place trades once the set criteria is met.

The features and functions available may differ from one software package to the next and may come in different versions. Apart from brokers, independent vendors also provide day-trading software, which tend to have more advanced features.

How Does Day-Trading Software Work?

Three basic features of any day-trading software include:

  • Functionality allowing the setup of trading strategy (based on technical indicators, news, trading signals or pattern recognition) in the trading system
  • Automated order-placing function (usually with Direct Market Access) once the criteria are met
  • Analytical tools to continue assessment of existing holdings (if any), market developments and features to accordingly act on them 

Any day-trading software will require a one-time setup of trading strategy along with setting the trading limits, putting the system on live data and letting it execute the trades.

A simple example: Assume stock ABC is dual-listed on both the New York Stock Exchange (NYSE) and on Nasdaq. You are looking for arbitrage opportunities and there is a day-trading software available for it. You setup the following:

  • Select stock ABC for arbitrage and select two markets (NYSE and Nasdaq) for trading.
  • Assuming both legs of intraday trade costs you a total of $0.10 per share for brokerage and commission; you aim to look for price differentials between the two markets in excess of that amount. So you set (say $0.20 or above) as the price differential—i.e., the software should execute a simultaneous buy and sell order only if the bid and ask prices on the two markets are differing by $0.20 (or more).
  • Set the number of shares to be bought and sold in one order (say 10,000 shares).
  • Let this setup go live.

Say the software identifies that ABC has quotes of $62.10 on NYSE and $62.35 on Nasdaq (a differential of $0.25) for orders of more than the set limit of 10,000 shares. The day-trading software will initiate trade as it matches the defined criteria, and will send orders to the two exchanges (buy at lower priced and sell at higher priced). If everything goes well, this day-trading software will make ((62.35 – 62.10) – 0.10 = 0.15) * (10,000) = $1,500 of net profit for the trader in a flash.

Further enhancements in the above software may include stop-loss features—say if only your buy trade gets executed but not the sell trade. How should the day-trading software proceed with the long position? A couple of options can be included as enhanced features in the software:

  • Continue to look for sell opportunities at identified prices for a specific time. If no opportunities are identified in specified time, square off the position at loss.
  • Set stop loss limits and square off the buy order, if the limit is hit
  • Switch to an averaging technique—buy more stocks at lower prices to reduce the overall price

The above is an example of arbitrage where trading opportunities are short lived. A lot of these types of day-trading activities can be setup through day-trading software and thus it becomes extremely important to select the right one matching your needs. Some characteristics of good day-trading software:

  • Platform independence: Unless a trader is running highly complex algorithms for day-trading requiring high-end dedicated computers, it is advisable to go with a web-based software offering. Benefits include: connectivity from anywhere, no manual installations of upgrades and no maintenance costs. However, if you are using highly complex algorithms that require advanced computing, then it is better to consider dedicated computer-based installable software, although that will be costly.
  • Your specific needs for day trading: Are you following a simple day-trading strategy of moving-average tracking on stocks, or are you looking to implement a complex delta-neutral trading strategy including options and stocks? Do you need a forex feed or are you trading on specific products like binary options? Trusting the claims on stock brokers’ website content is not enough to understand the offering. Ask for a trial version and thoroughly assess it during the initial phase. Alternatively, check the screen-by-screen tutorial (if available) from the stock broker or vendor to clearly understand the right fit for your day-trading needs.
  • Additional Features: Day trading attempts to capitalize on short term price movements during the day. Such short-term price movements are in turn driven primarily by news and supply and demand (among other factors). Does your day-trading strategy require news, charts, Level 2 data, exclusive connectivity to particular markets (like OTC), specific data feeds, etc.? If so, are these included in the software or would the trader have to subscribe to them separately from other sources, thereby increasing the cost?
  • Analytical Features: Pay attention to the set of analytical features it offers. Here are few of them:
  1. Technical Indicators/Pattern Recognition: For traders who attempt to benefit from predicting the future price level and direction, a wealth of technical indicators is available. Once the trader finalizes the technical indicators to follow, they should ensure that the day-trading software supports the necessary automation for efficient processing of trades based on the desired technical indicator.
  2. Arbitrage Opportunities Recognition: To benefit from the slight price difference of a dual-listed share on multiple markets, simultaneous buying (at a low price exchange) and selling (at a high price market) enables profit opportunities and is one of the commonly followed strategies using day-trading software. This requires a connection to both markets, the ability to check price differences as they occur and execute trades in a timely manner.
  3. Mathematical model based strategies:  Few automated trading strategies based on mathematical models exist—like the delta-neutral trading strategy—that allow trading on a combination of options and its underlying security, where trades are placed to offset positive and negative deltas so that the portfolio delta is maintained at zero. The day-trading software should have the in-built intelligence to assess the current holdings, verify available market prices and execute trades for both equity and options as needed.
  4. Trend following strategies: Another large set of strategies commonly implemented through day-trading software.

As can be observed from above list, the sky is the limit with computer programming and automated software systems. Anything and everything can be automated, with lots of customizations. Apart from selecting the right software, it is very important to test the identified strategies on historical data (discounting the brokerage costs), assess the realistic profit potential and the impact of day-trading software costs and only then go for a subscription. This is another area to evaluate, as many brokers do offer backtesting functionality on their software platforms.

  • Cost of software: Is the software available as a part of standard brokerage account or does it come at an additional cost? Depending on your individual trading activity, the cost benefit analysis should be carried out. Care should be taken to assess the available versions and their features. Most trading software comes free by default with a standard brokerage account but may not necessarily have all the required features meeting your trading needs. Be sure to check the costs of higher versions which may be significantly higher than the standard one. These costs should be discounted in evaluating the returns from trading and decisions made based only on the realistic gains.
  • Price Accuracy: Does the broker and day-trading software support NBBO (national best bid and offer)? Brokers who are NBBO participants are required to execute the client trades at the best available bid and ask price, ensuring price competitiveness. Depending upon the country specific regulations, brokers may (or may not) be mandated to provide the best bid and ask prices. Traders trading international securities with international brokers and software should consider confirming on this for the specific market.
  • Protective Features: It’s exciting to have software make money for you, but protection is paramount. With the advancement of technology, there also exist “sniffing algorithms & software” that attempt to identify the other-side orders in the market. They are designed to allow their owners to benefit from it by “sensing” the orders on other side. It will be worth considering if your day-trading software is vulnerable to such sniffing or whether it has preventive features to hide exposure to other market participants.

The Bottom Line

There are endless horizons to explore with trading using computer programs and automated software systems. It may be extremely exciting to make money at the click of a button, but one needs to be fully aware of what’s going behind the scenes: Is the automated order is getting at the right price in the right market, is it following the right strategy and so on. A lot of trading anomalies have been attributed to automated trading systems. A thorough evaluation of day-trading software with a clear understanding of your desired trading strategy can allow individual traders to reap the benefits of automated day trading.

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