Technology, mainly around stock trading, has evolved rapidly in the previous five years. It could be argued that this evolution has reached a “tipping point”, where the markets are now dominated not by humans but by machines.
So are computer algorithms now the dominant players? If so, what would happen to the markets if these algorithms were to go wrong? What kind of upheaval could they actually cause to the markets? Is this a real risk or an imagined one? These are the questions that are now being asked at the highest levels.
But how exactly do these algorithms work? What do they base their decisions on? Well, a trading decision could be triggered on the basis of some isolated news event for example. There are algorithms that closely monitor news feeds and use artificial intelligence to determine the possible direction a stock’s price could take on the back of a breaking story.
Other algorithms are not so directional in nature. They look for price discrepancies to determine arbitrage opportunities, constantly scouring the markets for where the best prices can be found.
Leading algo fund management institution algotraders.com looks into what is causing the authorities and the regulators to worry is the speed that these algorithms can send their orders into the markets. Using high frequency trading technology, these systems can send literally thousands of orders to an execution venue (an electronic stock exchange for example) every second.
This level of speed brings with it a new type of risk that is only now starting to be understood by the regulators.
In the last couple of years, these high frequency traders have come to dominate the markets. Industry estimates put their share of US Equity trading volume at anywhere between 50% and 80%.
There are two main concerns here. The first is the danger of systemic risk, or what might happen to the markets if one or more of these high frequency trading systems were to go haywire? Would it cause a kind of chain reaction and bring the markets to a complete standstill? The second concern is to do with the potential inequality that has come about from high frequency trading. Are the big Wall Street firms who can afford this technology profiting at the expense of the wider community of investors?
These are serious questions that require serious answers. Only time will tell if the regulators are able to come up with proposals that satisfy all concerned, high frequency traders, fund managers and individual investors alike.
Algotraders.com a pioneer in the algorithmic trading uses the algorithmic system to trade. The firm is also involved in fund management for its client through automated trading systems. One can start trading through the algotraders.com by clicking on the below link: