Automated Trading (Part 2 - Institutional Automated Trading)
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Loading ...In the previous article I looked at my early experiences with automated trading. In this article I want to look at automated trading by the institutions.
Automated Trading by the Professionals
A number of market commentators often post that the nature of the market has changed since the late nineties because the prevalence of automated trading has increased. They have blamed increased volatility and non-explainable market movements on automated traders and that “most” of the volume on the market is done by automated systems these days. They point to decreasing rates of employment by the finance industry as a sign of increasing levels of automation.
No doubt about it, markets do evolve and I am willing to believe that “some” of the volume on the market is connected to automated trading, but I find it difficult to accept that “most” of the volume is due to automated trading.
If you google the term “automated trading” it is interesting to note that the first page of results is stuff for retail traders or stuff written by academics. It is a good sign of who is using it. It is not the big guys. Most of the big money in the markets these days is still money from central bank reserves, sovereign funds looking after a countries coffers, wholesale funds looking after your mum and dad’s pension and multinational companies who sell hamburgers, soft drinks, drugs, oil, steel, credit, etc. The majority of players still use old fashioned position trading methods that date back to Grahame and Dodd and about the only high tech thing that has improved is they use a bit of asset allocation theory / portfolio management theory and perhaps they protect themselves with some options or some other structured product. Such funds are usually bound by the simple one directional plays based and asset allocation rules described in their prospectus. Very few prospectus for the really big funds with really deep pockets rarely say anything like “we use automated trading” in their prospectus.
Automated trading is usually the area of boutique hedge funds or quant trading desks in large houses and is sold to the market as an alternative form of investment to complement the boring old fashioned single directional play portfolios. Many large firms operate quant trading desks because their customers ask for it and they think they can collect the management fees.
Automated trading tends to operate in specific niches of the market where the speed, patience and objectivity of a computer can out pace a human. For example I would be willing to believe the days of the manual scalper is numbered and trading desks are letting their scalpers go in favour of the Dilbert types who can program.
In terms of explaining the reducing numbers of staff in finance area, in addition to the reduced number of seats for scalpers, the big funds are hiring the Dilbert types to help them balance their portfolios and either sacking half their analyst staff or outsourcing the analysis function because they have realized that the overhead of having large analyst services is not giving them enough of an edge for the overheads that they bring.