Does System Trading work ?

[rogerha]

I thought I would start off a bit off discussion here. I have read lots of posts from seemingly successful traders in this forum and others. The large proportion of the successful traders seem to favour price action and volume for making their trading decisions, most citing TA as a waste of time since measuring the past is no indication of what is happening in the future. I have also read a few posts by other traders that use TA with a bit of discretion, citing TA as an extremely useful tool or set of tools. But my (maybe incorrect) interpretation largely from this forum is that most of the long-term traders move to price action and volume and that there is no subsitute for this experience.

I read today something that surprised me and sort of 'countered' this opinion. Allegedly 50% of all volume on the London Stock Market is generated by 'Algo Trading', and that the remaining 50% of volume is generated by 'Manual Intervention'.

I read that to mean 50% of the current volume traded is automatically system traded by 'Black Boxes'. Now, if this is true, presumably there is some sort of TA involved or Neural Networks or whatever. But presumably since 50% of this volume is automatic, then system trading must work. Surely then, like any other method, it can work with degree's of success.

This statistic just surprised me, and I would be keen to understand what sort of technologies run on these black boxes. Are they using TA, Neural Networks, AI or what ? Somebody must know (although possibly can't disclose).

Or even better, is that statistic (which was released by the London Stock Exchange) accurate ?

 

[shadowninja]

I could ask a PhD contact at a hedge fund? (He writes Java stuff; probably not funky games like you see on the web, though.) What would I ask him so as not to sound like a berk?

 

[rogerha]

I don't really know :cheesy:

I guess if he is a PhD then he is working there in a Quant capacity ? I guess where I am going with this is that if system trading can be successful, is it possible that a retail trader can develop with limited programming knowledge and the right platform, a successful system ? Do you have to have incredible maths and/or market knowledge to do this ? (I suspect the latter is almost certainly true). Is it TA based or are there any other tools involved ?

You see, having messed around with mechanical systems for a couple of years now with mixed results, a bit of me still thinks it is possible, even though I am repeatedly proving to myself that it is not the case. I have certainly read about people that almost acheive it, but rather than be completely automated rely on discretion to actually pull the trigger.

 

[tommog]

im not doubting that there is a lot of systematic systems in the market however the whole "black box/ grey box" encompasses a whole range of trading techniques and the majority of them arent the system trading i imagine you are referring to i.e directional trades (If this crosses this then the market should go down etc.) There are suprisingly few trades like that taken. A lot of computerized trading is done to get edge in execution. I have worked on an energy desk where we had some very complicated programmes that legged spreads quicker than you could do manually. I know quite a few LSE traders that use algo systems for order entry speed.

 

[rogerha]

Good point tommog, and I didn't think of that. I suppose also considering what Shadowninja mentioned about a Hedge Fund that complicated hedges could be executed a lot quicker.

 

[Citizen2007]

I thought I would start off a bit off discussion here. I have read lots of posts from seemingly successful traders in this forum and others. The large proportion of the successful traders seem to favour price action and volume for making their trading decisions, most citing TA as a waste of time since measuring the past is no indication of what is happening in the future. I have also read a few posts by other traders that use TA with a bit of discretion, citing TA as an extremely useful tool or set of tools. But my (maybe incorrect) interpretation largely from this forum is that most of the long-term traders move to price action and volume and that there is no subsitute for this experience.

I read today something that surprised me and sort of 'countered' this opinion. Allegedly 50% of all volume on the London Stock Market is generated by 'Algo Trading', and that the remaining 50% of volume is generated by 'Manual Intervention'.

I read that to mean 50% of the current volume traded is automatically system traded by 'Black Boxes'. Now, if this is true, presumably there is some sort of TA involved or Neural Networks or whatever. But presumably since 50% of this volume is automatic, then system trading must work. Surely then, like any other method, it can work with degree's of success.

This statistic just surprised me, and I would be keen to understand what sort of technologies run on these black boxes. Are they using TA, Neural Networks, AI or what ? Somebody must know (although possibly can't disclose).

Or even better, is that statistic (which was released by the London Stock Exchange)
accurate ?

System trading, whether manual or algo does work. Traders who dont use algo's use a system of some type to make decisions and place orders. Programmers have just taken that skill to the next level in order to simplify the decision process by eliminating emotion based trading.

For an algo to work,I presume their must be a system developed manually that can the be converted into a program.

Same apples to black box systems, they work within the parameters that hey have been designed in. Very few, if any, black box systems will be able to incorporate ALL factors influencing price at all times, thus limiting their success.

But in terms of the statistics that you quoted, I read a while ago somewhere something along similar lines. The article was along the lines that most professional traders are using some sort of algorithms to trade, and that the success in the future for these professionals lies in who has the better program.

I cant remember where the article was, but I will search the web. If i come across it again, i will post the link.

 

[rogerha]

You're right Citizen, 'System Trading' perhaps was not the best title for this, I think what I really mean is Black Box trading. Which as you imply has restricted profitability. However it is emotionless in nature, which in certain environments might give it an edge ?

 

[shadowninja]

This thread begs the question: with a Black Box system, does the profit walk right in, walk, walk, walk right in? Is it right on time?

 

[alexander]

I read today something that surprised me and sort of 'countered' this opinion. Allegedly 50% of all volume on the London Stock Market is generated by 'Algo Trading', and that the remaining 50% of volume is generated by 'Manual Intervention'.

Or even better, is that statistic (which was released by the London Stock Exchange) accurate ?

Well, please forgive when I am going to say that you confuse two different things. Algo trading is a general term used for entering orders electronically from the buy or sell side. It has many objectives, like for instance getting the best execution price or breaking up large orders to smaller orders and routing them to different liquidity pools with the objective of minimizing impact on prices.

In US exchanges about 35% of volume is Algo Trading. One thing that you maybe misunderstand (excuse me if I am wrong but that is the impression I got) if the fact that Algo Trading has little relation to systematic trading or technical trading in the way these terms are normally used by traders in forums. Of course, one can consider systematic trading or technical trading with no human intervention a subset of Algo Trading but that is equivalent to considering both apples and tomatoes as agricultural products

Alex

 

[rogerha]

Thanks Alex. I think it is becoming clearer for me. I was putting 'Algo Trading' in the category of 'Black Boxes' and obviously it appears, that it covers a much broader scope than that.

Still I wonder how much Algo trading is actually black box trading. I am now beginning to think not much

 

[BSD]

Only thing that matters is what comes out at the end, or, in other words, results:

"FORBES

The Sleaziest Show On Earth

Hedge funds will suck in $100 billion this year from an ever-broader swath of investors. Pretty good for a business rife with exorbitant fees, phony numbers and outright thievery.

It's amateur hour in the hedge fund business. This sideshow of sometimes bizarre (and always costly) investing is on a tear like never before. It's attracting some of the shrewdest and sharpest minds on Wall Street--and also shills, shysters, charlatans and neophytes too crooked or too stupid to make any money for you. In 1990 only 600 or so U.S. hedge funds were in business. When we last surveyed the genre (FORBES, Aug. 6, 2001) there was $500 billion on the table globally. Now $800 billion is invested, says Hedge Fund Research, a hedge fund tracker, divided among 6,300 funds--900 of them less than a year old. Besides growth, there is a lot of coming and going in this business. More than 10% of hedge funds tracked in the past year by HedgeFund.net are now defunct.

...What is driving this red-hot industry: fees that would be outlandish or even illegal if extracted from a plain old mutual fund. "It's obscene," says Alice Handy, who invested in hedge funds for over a decade while running the University of Virginia endowment. "The fee structure is so compelling that everyone and his brother want to run a hedge fund now."

For customers the illusion is that the high fees go hand in hand with high returns. Do they? Hedge funds exist in a lawless and risky realm, exempt from the rules governing mutual funds, equities and most other investments. Hedge funds aren't even required to keep audited books--and many don't. These risky funds often are guilty of inadequate disclosure of costs, overvaluation of holdings to goose reported performance and manager pay, and cozy ties between funds and brokers that often shortchange investors. As for tales of pots of gold at the end of some rainbows, you have to be skeptical. Yes, some funds have racked up stunning results. Others have gone bust. The winners you hear about. The others just disappear from the performance databases. No surprise there: Reporting of performance is voluntary.

...But even when hedge funds are legit, the way their returns are rated is rife with abuse. The charade begins when managers start up several funds but report results only for the winners, leaving out the losers entirely. This convenient maneuver was present at over half the 3,600 funds tracked by TASS, the industry's largest tracking service and a unit of Oppenheimer Acquisition, according to "A Reality Check on Hedge Funds Returns," a working paper published by Free University in Amsterdam.

It gets worse. At the tail end of their lives, hedge funds that suffer lousy returns often stop reporting them long before closing."...

Pretty much the same applies to banks.

That's not to say that systems trading, or, what I suspect the author of this thread means, statistical arbitrage, doesn't work per se.

It's just down to the same limitations of all trading:

It's not about being right and erroneously believing you've discovered the holy grail which doesn't exist as Long Term Capital Management et al, or, this summer, a lot of banks from all over the world had to discover the hard way, it's just about being net profitable, which means you accept that losses are part and parcel of trading, and that you will have losing streaks from outlier land that can and will break any overleveraged strategy based mainly on the unsustainable hope that uninterrupted winning streaks will continue into infinity.