Volatility puts algo trading under pressure

A

ASusilovic

Recent market turbulence has tested banks' technology and is putting a question mark over whether increasingly popular computer-generated algorithmic trading is suited to volatile conditions.

Algorithmic trading -- where computers make multiple trades in fractions of a second -- has soared to make up 30 percent of equity trading volume according to industry analysts AITE group.

It is also increasing popular in the $3.2 trillion a day in foreign exchange market.

EBS, the biggest interbank venue for foreign exchange trading, says algorithmic trading has doubled from around 15 percent of its volumes at the start of 2006 to 30 percent now.

But traders say current volatility is showing the limitations of this form of trading, in equities and forex.

"Algorithmic trading works by taking historical moves to predict what will happen in the future," said Lee Ferridge, senior proprietary trader at Rabobank.

"When market moves bear little resemblance to what has happened in the past all types of model will struggle.

[...]"You don't need to be a major bank to get involved. We've had small banks in Moscow and Riga signing up and I'd expect to see volumes moving up to 40 percent by the end of next year from around 30 percent now," said Steve Toland, head of sales at ICAP.

http://www.reuters.com/article/reutersEdge/idUSL2648150020071026

Moscow, Riga ! LOL ! Great ! That´s what I call global markets ! HA, ha, ha
 
If markets are hard-wired to confound the majority and the majority become algorithmic traders, does this imply that the markets will become hard-wired to confound algorithmic traders?

Could we be on the cusp of a golden age for discretionary methologies?
 
Quote from tortoise:

If markets are hard-wired to confound the majority and the majority become algorithmic traders, does this imply that the markets will become hard-wired to confound algorithmic traders?

Could we be on the cusp of a golden age for discretionary methologies?
More...

as long as the discretionary trader has a plan then his trading can be automated. its just that most traders dont have a plan and just guess which in that case could be automated too using a randomizer.
 
Quote from rosy2:

as long as the discretionary trader has a plan then his trading can be automated. its just that most traders dont have a plan and just guess which in that case could be automated too using a randomizer.
More...


I have a plan. I doubt it can be automated, although I'd love to be proven wrong.

Permit me to explain the reason for my skepticism by way of an analogy.

Let's say I have a plan for getting ahead at the office. A key component of this plan involves discerning the moods of my boss. Generally, boss mood "A" merits my response "A." For example, when he's grumpy, I have determined, emperically, that my "safest" response is to avoid him altogether.

Sometimes. however, a grumpy mood is best met by a different response -- say, by telling him joke and getting him to smile. My ability to exercise discretion in this regard -- and to do so effectively, strategically -- sets me apart from my office competitors, some of whom stick to a more "binary" approach.

I would contend that my ability to read the boss' moods and adjust my reponses accordingly is not a function of caprice or whimsy, but a calculation on my part based, ultimately, on some exceedingly subtle algorithm of the mind.

To the best of my knowledge, however, software/hardware has not attained the level of nuance where computers can read people as well as people can read people. If this is true, it doesn't seem to be much of a leap to argue that computers can't read the emotions of markets as well as a skillful student of the market's moods.
 
Quote from tortoise:

I have a plan. I doubt it can be automated, although I'd love to be proven wrong.

Permit me to explain the reason for my skepticism by way of an analogy.

Let's say I have a plan for getting ahead at the office. A key component of this plan involves discerning the moods of my boss. Generally, boss mood "A" merits my response "A." For example, when he's grumpy, I have determined, emperically, that my "safest" response is to avoid him altogether.

Sometimes. however, a grumpy mood is best met by a different response -- say, by telling him joke and getting him to smile. My ability to exercise discretion in this regard -- and to do so effectively, strategically -- sets me apart from my office competitors, some of whom stick to a more "binary" approach.

I would contend that my ability to read the boss' moods and adjust my reponses accordingly is not a function of caprice or whimsy, but a calculation on my part based, ultimately, on some exceedingly subtle algorithm of the mind.

To the best of my knowledge, however, software/hardware has not attained the level of nuance where computers can read people as well as people can read people. If this is true, it doesn't seem to be much of a leap to argue that computers can't read the emotions of markets as well as a skillful student of the market's moods.
More...

Great post! I totally agree. It's one thing for a computer to see a bar formation or indicator trigger, but quite another for a trader to see the subtle nuance of HOW the price action evolved. How has the market acted that day on an up move? How it reacts to a down draft? Who lifts? Who holds? No way current computer programs can get the feel that a human brain can. Maybe 5-10- 15 years from now, artificial intelligence computers will be the only ones trading among themselves but were not there just yet.
 
Just wait until the machines take over.
One day they will create an artificial panic and crash or markets.. I think this can also exploited if these machines use past trend lines this can be predicable behavor
 
Quote from tortoise:

I have a plan. I doubt it can be automated, although I'd love to be proven wrong.

I would contend that my ability to read the boss' moods and adjust my reponses accordingly is not a function of caprice or whimsy, but a calculation on my part based, ultimately, on some exceedingly subtle algorithm of the mind.
More...

the calculation on your part could be automated if its consistent. anyway,
maybe there is a guy who can "read" the market and has a feel but when you look at the super traders their winning/losing ratio is about 50/50 so they dont even know winners from losers.

i am sure most people on this board will agree with you because the market feel approach to trading requires no work. its just fun.
 
Quote from NQscalper:

Great post! I totally agree. It's one thing for a computer to see a bar formation or indicator trigger, but quite another for a trader to see the subtle nuance of HOW the price action evolved. How has the market acted that day on an up move? How it reacts to a down draft? Who lifts? Who holds? No way current computer programs can get the feel that a human brain can. Maybe 5-10- 15 years from now, artificial intelligence computers will be the only ones trading among themselves but were not there just yet.
More...

Yes... what I have been trying to explain repeatedly...
But a better way to frame it is...

Pro Trader with 10 years Experience Intelligence

VERSUS

Computer Algorithm "Intelligence".

Everybody here is looking for a short-cut to free money...
So the incredible Learning Curve a successful trader goes through in 10 years is trivialized and discounted.

That was the setup... here is the main point:

In quiet, routine markets...
Computer algorithms perform well.
For example...
It's straight-forward to automate a market maker in a quiet market.

But when you have these dramatic Asset Value Realignments every few years...
And high volatility coupled with a breakdown of many historical realtionships...

What happens?

Algorithmic trading pretty much breaks down...
Or better... STATIC STRATEGIES break down...
And actually become GUARANTEED losing strategies... even a blowup recipe.

Concurrently...
Experienced Pro Traders have seen this movie 5 or 6 times before...
Make ** complex, counterintuitive ** adjustments that avoid losses...
And usually make large, windfall profits off the volatility.

In a liquidity crunch like August 2007...
Billions and billions of dollars are TRANSFERED...
From primitive Static Algo Systems...
To highly intelligent, adaptive systems run by Human Experts.
 
Quote from QuantPlus:

Yes... what I have been trying to explain repeatedly...
But a better way to frame it is...

Pro Trader with 10 years Experience Intelligence

VERSUS

Computer Algorithm "Intelligence".

Everybody here is looking for a short-cut to free money...
So the incredible Learning Curve a successful trader goes through in 10 years is trivialized and discounted.

That was the setup... here is the main point:

In quiet, routine markets...
Computer algorithms perform well.
For example...
It's straight-forward to automate a market maker in a quiet market.

But when you have these dramatic Asset Value Realignments every few years...
And high volatility coupled with a breakdown of many historical realtionships...

What happens?

Algorithmic trading pretty much breaks down...
Or better... STATIC STRATEGIES break down...
And actually become GUARANTEED losing strategies... even a blowup recipe.

Concurrently...
Experienced Pro Traders have seen this movie 5 or 6 times before...
Make ** complex, counterintuitive ** adjustments that avoid losses...
And usually make large, windfall profits off the volatility.

In a liquidity crunch like August 2007...
Billions and billions of dollars are TRANSFERED...
From primitive Static Algo Systems...
To highly intelligent, adaptive systems run by Human Experts.
More...

Hum...QuantPlus...your ET member name seems quite "sarcastic" in relation to your comments, or ? :D
 
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