Fin-ology

Episode 17: Computers taking over Wall Street

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Recorded 2015-05-29

Is the rise of algorithmic trading the end of Wall Street as we know it? Or the start of a whole new era of securities trading? We discuss the benefits, pitfalls, future, and regulation surrounding algorithmic or black box trading.

Show Notes

  • Pimco founder fired from his own firm, What is the future of Bill Gross?
  • Trading landscape has changed drastically; the days of manual trade orders are quickly diminishing
  • Automated trading has shifted from simple fundamental algorithms to complex black box trading strategies (aka high frequency trading, or HFT) trading billions of dollars
  • 50% of all orders are made by a computer
  • The difference between fundamental based trading and trading strategies based on current market conditions is the key to many HFT strategies
  • Proposed benefits of HFT relate to liquidity; tightening spreads and making order fulfillment easier
  • Regulators believe that there are significant risks in this type of trading
  • Domino effect of HFT during a sell off without human interaction can lead to drastic consequences: example, 2010 Flash Crash eliminating $1 trillion from stock market
  • EU requiring HFT firms report all trades and all orders
  • Collecting orders is pertinent due to the order stuffing strategies of many firms
  • Order stuffing happens almost instantaneously (milliseconds)
  • Where is the unfair advantage?
  • HFT strategies have access to order data that allow them to “skip” other trades in line.
  • The SEC does not comment on whether or not this is good or bad, just that they understand how this information is being provided to firms.
  • The plight of the average trader will never go away regardless of what strategies are used, the bigger firms will always have more information and resources i.e. Bloomberg Terminal for $30,000 annually
  • The largest problem is that regulators are unsure of how to measure the impact good or bad of HFT on the market, may be a problem that will never have a solution
  • Minimal ability automated trading is available to everyday investors including API access from large brokers to execute trades automatically. Interactive Brokers is known for this.
  • Regardless of information and trading resources, larger firms are paying to have their servers located close to exchanges to minimize latency (this makes their order travel faster to the exchanges)
  • Even though HFT firms are able to rebound after a negative “flash crash” type, normal investors will be stopped out at the lowest possible point
  • Perception that information is passed instantaneously is a mirage, the reality is information still needs to travel from one point to another albeit quickly
  • Google pre-caches sites to make information seem instantaneous. Facebook has established a similar strategy with news articles through Facebook Instant Articles.
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    Fin-ologyBy The Atapha Group