The Impact of Automated Trading

[oiltanker]

Given automated or algorithmic trading is now up to 80% of the action in some markets and the others are catching up does it mean the end of the retail day trader? Automated trading deals with information and initiates trades faster than the mind can process it and even before the information hits the screen of the retail trader. In the current market it is said to increase volatility because the algorithms tend to buy when high and sell when low.

Certainly within the lower time frames the moves are so fast it is difficult to trade with consistent good execution. However on the larger time frames any simple method like 5 8 cross would have given a retail trader excellent results this year providing they could handle the large stops.

automated trading is increasing every year. there are now automated system for the retail trader. what do people see as their impact?

some links for automated trading

algorithmic trading - Google Search

 

[JTrader]

you just need to figure out what tactics the price movers are employing and follow as closely as possible. Not a simple task though.....

 

[new_trader]

An utter load of rubbish!

 

[oiltanker]

glad everyone is winning.

boris talks about it here

>>Algorithmic trading, I told her, has really exaggerated the recent moves in the FX market.

Algorithmic trading is simply a fancy way of saying computer driven trading. Much like the equity market, the FX market has seen a vast increase in computer based model trading over the past several years. The advent of electronic hubs like Currinex has made it much easier to run computer based models that often trade 200-300 times per day.

Most computer algorithms are moment based - they buy when prices are rising and sell when they are falling. The net effect is that volatility, which is already extremely high in today’s markets is amplified even more by the action of the robots. Ironically enough, the cold, calculating machines are now actually exaggerating rather than tempering the human emotion behind the price flow.<<

BK Trader FX Weekly - Revenge of the Machines 11/1-7/08 | BKTraderFX Boris Schlossberg Kathy Lien

 

[new_trader]

1) What/Who is causing the prices to rise and what/who is causing the prices to fall?

and during these moments

2) Who are the robots buying from and who are the robots selling to?

Be a robot!

 

[foredog]

The computers create opportunities, how often now will a stock be down 7 or 8% already on next to nothing, pause for a few minutes and then the next tick down causes it to tumble another 5% in a few minutes as all those stops kick in.

Be aware of these pauses and as they start to trade down sell and wait for the robots to throw cash at you!

 

[new_trader]

Also, DON'T DATE ROBOTS!

 

[foredog]

But the stepford wifes look hot

 

[oiltanker]

if the majority of the market is robots and robots tend to be momentum traders then it gives a clue to the increasing character of the markets?

Momentum

 

[new_trader]

if the majority of the market is robots and robots tend to be momentum traders then it gives a clue to the increasing character of the markets?

Momentum

No! The majority of the market is tiny pink elephants in tutus. They are responsible for volatility and they trade in any and every 'timeframe'. These tiny pink elephants in tutus ignore indicators and know exactly where you enter your trades and where you place your stops. There is absolutely nothing the retail trader can do to beat them. Nothing.

 

[Adamus]

These tiny pink elephants in tutus ignore indicators and know exactly where you enter your trades and where you place your stops.

So these tiny pink elephants in tutus are actually hot-wired into the market (otherwise they wouldn't know where our trades are).

I like the idea.

However I think I know a way to beat them .... if it wasn't for the blasted robots.

 

[foredog]

Badgers, they'll beat up ur elephants and rip out the robots wires!

 

[mauzj]

In the current market it is said to increase volatility because the algorithms tend to buy when high and sell when low.

I'd actually heard the opposite. That a lot of automated trading algorithms are very close to market making, and that they therefore dampen volatility.

 

[Paul71]

I'd actually heard the opposite. That a lot of automated trading algorithms are very close to market making, and that they therefore dampen volatility.

Probably so. The 'average' of automated systems can only be 'normal' market behaviour. Otherwise, somebody somewhere, is getting it wrong, or having a 'toffee crisp'.

If the markets are 80% or whatever automated, just trail the play. No automation will dare take on what has been the law since day dot, otherwise it's goodnight Vienna for the said automated system, and the human automators know this.

 

[Don-e]

An oldie but a goodie.

http://www.fsa.gov.uk/pubs/final/cgml_28jun05.pdf

Don

 

[Adamus]

So CGML basically just tried to corner the market - funny how the FSA decided that it just wasn't cricket. However I know nothing about this MTS bond trading platform, so I guess maybe its not a free-for-all.

 

[mauzj]

Did they only make £10m on it? I seem to remember they made a few billion in seconds. But as arabiannights said, I'm getting old and senile.

 

[rnicoll]

Right now, I'm seeing two major types of 'bot. Momentum/break-out, and trend-reversal/market maker. The former tries following trends, the latter (and my work falls in this category) looks for the end of a trend and tries to trade the reversal. I imagine there's a few seriously fancy ones that attempt to actually price what they're trading, or will change strategy depending on market conditions, but I think most fall into those first two categories.

Scalpers and anyone trying to market make by hand is probably screwed. Sorry guys. On the other hand, if you're actually considering the fundamentals and trading based on how much you feel something is actually worth, you should be able to take a health chunk out of the robot's profits.

One of the things I'm looking at is computer-assisted trading, where a human provides guidance to a computer trader. So if the human says something is over-valued, it trades algorithmically keeping that fundamental analysis "in mind" as it were...

 

[AnEdge]

First of all the figure of "80%" of all orders is algo is misleading...what do you mean by this ? For example a large side buy side firm execution a portfolio change for a pension client where they are trading $30M of stock will use some sort of algo to get the execution done, eg. VWAP/TWAP/etc

This is versus a hedge fund algo that is looking to generate alpha and is in/out quickly.

My point is that the automation of the markets is only just beginning, we are on 3rd gen algos but they are still very crude.

What do about it ? Well, if you are a day trader (sounds like you are ) then there is lots of opportunity because algos consistenly repeat themselves. If you can figure out the personality/characteristics (eg. read the tape) of certain stocks, you can make good money. I should point out that this is not my thing ( I am focused on automated trading), but I have good friends who make a very nice living doing intraday discretionary trading by trying to predict/take the other side of expected changes due to automated trading

 

[oiltanker]

i've been researching mathematical finance. there are courses in it at uni's. Basically mathematical finance regard most technical analysis as little better than 'a belief in santa' because they say price has no memory whereas technical analysis is nothing but price memory. There are even courses called 'using black scholes to take on the chartists'. Presumably they think its easier to predict chartists and so make money from them than it is from the market?

from lectures i ve read most reckon automated is now about 60% and say it will increase. the hot topics are neural networks and genetic programming. they say its hard to work out what is going on because anyone employed to work on it is signed to silence. [which sorts of blows the water out of the people selling their system- any real system would be a goldmine. who would tell anyone where the gold mine was unless there was no gold in it? ]

automation makes the market more efficient and will increasingly do so making it harder for non automation to compete. Sort of like tesco building a hyper store next to the corner shop.

however as long as markets are inefficient it is possible for individuals to make money and one would think it would never be 100% efficient. nothing is. And there will always be the golminers looking for the motherload....we've all been there.