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.
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 diminishingAutomated trading has shifted from simple fundamental algorithms to complex black box trading strategies (aka high frequency trading, or HFT) trading billions of dollars50% of all orders are made by a computerThe difference between fundamental based trading and trading strategies based on current market conditions is the key to many HFT strategiesProposed benefits of HFT relate to liquidity; tightening spreads and making order fulfillment easierRegulators believe that there are significant risks in this type of tradingDomino effect of HFT during a sell off without human interaction can lead to drastic consequences: example, 2010 Flash Crash eliminating $1 trillion from stock marketEU requiring HFT firms report all trades and all ordersCollecting orders is pertinent due to the order stuffing strategies of many firmsOrder 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 annuallyThe 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 solutionMinimal 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 pointPerception that information is passed instantaneously is a mirage, the reality is information still needs to travel from one point to another albeit quicklyGoogle pre-caches sites to make information seem instantaneous. Facebook has established a similar strategy with news articles through Facebook Instant Articles.