With so many technological advancements, predicting the future of trading can’t really be that difficult. Computers can break down currency transactions to search for good stock prices just as any normal trader would. However, the only major difference between human traders and machines is that machines don’t employ the use of chat rooms, which, if you can remember, have attracted a high degree of scrutiny from trading regulators who attempted to disclose all evidence leading to manipulative practices in the market.

And because of this high frequency trading is seen as a solution to the Forex market and has now become a benchmark in case of trading complications and a crisis in the markets. So, what are human traders to do then just babysit the algorithm trading systems? ICAP’s Justyn Trenner stated,

“To the extent the future is machines, its humans babysitting machines, it’s like the U.S. Air flight that landed on the Hudson River. The pilot had to control the angle of descent manually and used the autopilot to keep the plane level; Captain Sullenberger could only do this because he knew how to use the machine”.

And it is true when you think about it, because can you ever go to sleep behind the wheel after putting your car on cruise control? However, if you look at the algorithm and high frequency trading from a broader perspective, you will realize the machines can significantly aid traders in choosing the most perfect trade condition and help execute decisions fairly rapidly.

The chief execute of C-View, Paul Chappell said,

“[Algorithms] seem the most appropriate way to execute a trade. We have implemented a tool to take profit and stop losses on each currency. This program automatically puts a risk wrap around our trades, saving us the manual effort of introducing the same controls manually.”

Over the last couple of years, you may have witnessed a great deal of change in the financial community, more specifically in trading and the investment markets. There have been some cutting edge advancements made pertaining to how trading data and information is transferred and how traders use this information to conduct fast trades. Not to mention the significant progress which has been made in regards to how traders communicate with each other.

>The technology has made a great impact on the financial industry and has helped democratize entire equity markets. In simple words, traders are now seeing an end to trading floors where trades in stocks, commodities and foreign exchange. This is how technology impacted trading:

Simultaneous Access and Information Gathering

For a majority of traders and investors, the technological trends shifts in trading have provided a beneficial window of opportunity. And traders and investors these days and for the days to come will not have to lead a central position at an important hedge fund and neither would they have to work hard to make important connections with the brokerage community over at Wall Street.

This is mainly because of the fact that all vital information and updates pertaining to the stock and Forex markets are now made available instantly to all traders via news sources like CNBC and Bloomberg as well as on websites like Forbes.com and Seeking Alpha and social media networks like Facebook and Twitter. This automation and the free flow of financial notifications give a strong chance to every trader to make his trading decisions and implement his strategies. Information is now accessible to anyone and not just the top dogs in trading.

Individual traders can now eliminate the time limit and delays that over the years have accompanied trading reports pertaining to government inflation and corporate earnings and data. Traders of today and tomorrow will use different stock and Forex trading and investment platforms designed to help you trade via your smartphone, tablet, PC, and laptop from virtually anywhere in the world which means you will never be detached from the financial world. Plus, traders will also get financial notifications on the go using various trading applications.

Moreover, all this innovation has also allowed traders to come up with various types of strategic trading methods they implement in order to establish their positions in the financial markets for assets. Algorithm trading or high frequency trading have been established as the most popular form of trading traders from different financial firms have started to use. In fact, there are many recognized and well-known traders in the market who firmly believe that algorithms, along with complex charting and analysis of trades, can make traditional approaches to analysis and evaluation redundant.

Although this is disconcerting to some traders but you cannot undermine the fast developing trends technology is bringing, especially at this stage. It has therefore become increasingly apparent that electronic trading has taken over a considerable portion of both stock and Forex markets.

Increased Trader Competition

Ryan Jordan who is a market analyst at Prime Trade said that,

“It is now relatively easy for individual traders to gain access to a wide variety of asset classes, and to trade them high efficiency execution. This is why there is such a high level of competition from broker to broker to carve out larger sections of the market.”

 

If you look at it from a broader perspective, competition can be a good element here. And this competition has resulted in various brokerage firms drastically altering their approach in order for the financial communities to take notice. For example, most brokerages firms have guaranteed, that’s right, they have guaranteed stock and Forex traders a ‘trading execution’, which means they ensure traders their stock orders will be executed at exactly the price levels they want. But, as you may know, guaranteeing this is impossible when market volatility sets in, making price execution impossible.

Secondly, a majority of modern-day brokerage companies have explained price slippage can be devastating, especially when you’re talking about a highly volatile market. And this is where trading platforms come in and many platforms have undergone several improvements to guarantee efficiency in trading.

The future of trading is bright although it is too soon to be predicting any trends changes. When you talk about trading, marketing specialists have predicted that three or four year down the line even non-professional traders will also be able to establish themselves in the market for assets and the Forex market, which is a good thing.

Market Place

MKTPlace is a leading digital and social media platform for traders and investors. MKTPlace offers premiere resources for trading and investing education, digital resources for personal finance, news about IoT, AI, Blockchain, Business, market analysis and education resources and guides.

 

“Algorithmic trading frees you from the drudgery, but do you have good ideas? There aren’t that many masterpieces out there.”  EquaMetrics’ Christopher Ivey

Several traders and investors in the global money markets have been for quite some time transforming their entry, exit and financial management and investment strategies into automated computerized trading which in turn allows the computers to trade for them. And you have to understand that one of the biggest advantages of using technology is the fact that it complete eliminates any emotion. It takes the emotion and any bias right out of the trade.

However, it is also important to note that when you let the machine do all your work, especially when you talk about trading, there are bound to be a few mistakes and these mistakes can be pretty much devastating for both traders and the markets. For example, let’s go back to the ‘flash crash’ which happened back in May 2010. And it happened in August 2012 as well when the trading software used by the traders and investors at Knight Capital Group Inc. broke down. What this crash did was cause a series of unintended stock trades which resulted in a $440 million loss for the company.

And the irony of all it was the fact that Knight Capital Inc. was known in the financial world as a market trendsetter and trailblazer which employed the services of experts and seasoned traders and investment specialists who had the ability to monitor trades on both sides of a particular security to make sure that the market functions smoothly. However, despite the probability of setbacks, almost all of Wall Street now heavily depends on algorithmic programs to conduct trades quickly and decisively.

There is no doubt about the fact that many traders have mixed feelings about using computerized programs to run the show and say too much algorithm trading might just destabilize the markets. And another thing, algorithm trading isn’t something that was invented a few years ago. The concept was implemented several decades ago.

Algorithm Trading – A Look Back in Time

Back in 1951, a student from the University of Chicago, Harry Markowitz, acted on the advice of his Ph.D. supervisor, Jacob Marschak, and proceeded to complete his dissertation on how to successfully apply complex mathematical algorithms and concepts and fuse them with the financial world, more specifically, the stock markets. The result, however, turned out to be quite fascinating and transformed into a modern portfolio explaining the difference and conflict between a security and how it may affect the profits risk-averse traders demand when dealing in potentially riskier securities.

Back then, the normal method to calculate and determine a variance in securities included a thorough evaluation approach which was designed by John Burr Williams in the 1930s. Investors used Burr’s price-to-earnings ratios and other factors pertaining to the overall statistical health of a company or organization. These methods helped traders at the time to determine whether or not the real price for a security became a standard tool for analysts.

An Enhanced Trading Portfolio 

Once Markowitz came up with his brilliant new method, he aided in the development of various algorithms that do all the important and necessary calculations to make an enhanced trading portfolio. With his intellectual contributions and the advent of the IBM System/360 central processing unit in 1960, strategy traders and investors as well as various financial economists had the power to methodically evaluate millions of information and data centres that have been produced since.

Around the same time, there was another trading methodology that became popular, named the Signal theory, a strategy that implemented to extract various patterns and information from a given set of data. Stock charting experts and analysts were never too worried about the price of a security. What they were concerned with is how much would the price fluctuate. The data extracted or collected from a fluctuating stock price drops in value far too quickly. So, when investment companies were emphasizing on a core and fundamental analysis that would aid in the execution of trades stretched over a period of several days or weeks, the signals experts detect have to be executed right then and there.

Investment companies since then have been trying not to rely too much on human trade executions and decisions and that is why most of them switched to using computerized programs as algorithms are designed to conduct instantaneous trades on the fleeting information given. Long-Term Capital Management, which was established in 1994 by John Meriwether, employed algorithms and computer programs to identify tiny fleeting variances in stocks and securities so they could make hefty profits.

On the other hand, the company was also experiencing a shortfall in yearly profits solely because of the fact there were other firms which began to use algorithm trading technologies. This led to LTCM devising other strategies that didn’t quite seem to pan out and resulted in the fund losing everything in 1998.

With the downfall of LTCM, there was little consideration to the potentially destabilizing effects of algorithm trading in the money markets. And within a decade or so, algorithm trading transformed into nano-trading. Nano-trading is all about catching the signal faster than others. Even a second seems like forever in the financial world. For example, an algorithm trading centre near the New York Stock Exchange would use its servers to detect and catch signals a millisecond faster than a nano-trading company which is further away from the stock exchange.

It is also important to understand that traders and investors, even small ones, would never attempt to rely on the basic fundamental evaluation methods. And according to reports by chartists, algorithm trading will rule the trading world and looking back at history, it is makes sense to expect more problems associated with algorithm trading in the future.

Although algorithm trading has its merits and can prove to be a money-making tool, if executed correctly, at the same time it is also imperative you never substitute the use of technology for cleverly thought-out and well-executed trading.

Market Place

MKTPlace is a leading digital and social media platform for traders and investors. MKTPlace offers premiere resources for trading and investing education, digital resources for personal finance, news about IoT, AI, Blockchain, Business, market analysis and education resources and guides.