The influence of automatic trading on the markets

Since the financial markets are very complicated to understand, it requires effort and regular spending time. Therefore, many people have developed smart trading systems. This is how automatic trading systems emerged, which have grown in popularity over the past few years. With changing markets and technological advancements, automated trading is expected to continue to grow.

Automated trading: opening and closing positions without emotions

Automated trading involves using software to open and close positions in the financial market. As an investor, you can use automated trading to perform in-depth technical analysis. Next, you configure the settings for your positions. Some parameters include open orders, trailing stops, and guaranteed stops. Once these parameters are set, the trading process is managed from start to finish, which means investors can spend less time monitoring their positions.

The automated trading setup allows you to quickly open multiple positions without emotional influence. All your position rules are already included in the settings you define upstream. Some algorithms even allow you to use predefined strategies to trade based on trends.

To do automatic trading, you must first determine which platform to use and create a strategy. You can then have a custom algorithm place trades based on specific parameters, like on the official Bitcoin Prime website. These parameters are usually the prices at which positions should be opened or closed, when they should be opened or closed, and the quantity that should be bought.

For example, you can tell the algorithm to buy 100 Apple shares when the 50-day moving average crosses below the 200-day moving average.

Automatic trading: saving time for the trader

By using an automatic trading system, you can quickly and efficiently execute orders by monitoring market prices. With this system in place, orders are executed if specific criteria are met; this allows traders to take advantage of specific technical events in the market.

Automated trading allows you to do the following:

  • Place orders can be scheduled at any time of the day or night. Therefore, you don’t have to set your strategy according to your schedule.
  • Use pre-established strategies to limit the emotional impact.
  • Analyze trends and opportunities through numerous indicators.
  • Simultaneously execute orders in real time as automatic trading eliminates the need to manually execute orders.

Robots manage nearly 7% of global cash!

Instantly placing thousands of market orders in seconds is high frequency trading. It is mainly Anglo-Saxon arbitration funds and investment banks like Goldman Sachs or Morgan Stanley that use this technique.

About half of all transactions on the Euronext stock exchange are linked to high-frequency trading, a practice that did not exist in Europe 10 years ago. Market experts explain that “today it is the source of more than a third of all transactions on Euronext”.

The continued lack of volatility in recent years has called into question the business model of THF funds, which is based on the evolution of prices. The Tabb Group reports that revenue from the practice fell to less than $1 billion in the US stock market last year. In 2009, these funds earned $7.2 billion through high-frequency trading, for example.

To continue operating, big players in the industry like Virtu Financial and Sun Trading have been taken over by other companies. For example, KCG Holdings was bought by Virtu Financial.

The sudden return to significant volatility in the financial markets seems to indicate that this calm period has run its course. This is due to the phasing out of ultra-loose Western monetary policies and the related political instability of recent times.

More than just high-frequency trading algorithms, market participants use robots in financial markets. A Morgan Stanley study estimated that assets in smart beta trackers and quantitative funds nearly tripled between 2010 and mid-2017. The study estimated that these funds were worth about $1.5 trillion, or about 7% of total global investment funds.

High-frequency trading and robots responsible for mini-crashes?

According to studies by the Toulouse School of Economics and the Autorité des marchés financiers, or AMF, high-frequency trading, or HFT, provides stocks with much-needed liquidity when the stock market is quiet.

It has recently been realized that in a volatile market, robots can lead to increased volatility due to high frequency and algorithmic trading. Most institutions recognize that these practices can aggravate volatility. We can therefore say that the mini stock market crashes are partly attributable to the responsibility of the robots. However, this practice has also drastically reduced transaction costs.

Programming errors or computer bugs in the market can also cause dramatic changes in prices. Dominique Ceolin says this has happened before due to problems with trading algorithms or traders’ computers.

This was seen when Knight Capital – now KCG Holdings – had a technical issue on August 1, 2012. This issue caused 148 US stocks to fall due to Knight Capital’s high frequency trading services.

A huge impact on individuals and manual trading

One of the biggest drawbacks of stock market automation is the loss of ability to quickly process market information. Individuals cannot react to information as quickly as an algorithm.

It takes the average person about 0.35 seconds to blink. By comparison, high-frequency trading can execute orders in a millionth of a second. The robot therefore has time to pass hundreds of orders before a human blinks. To remedy this, several initiatives have been taken.

In the United States, the IEX Exchange opened in 2016 and is considered a no-go zone for high-frequency trading. The French stock exchange Euronext has long used “short-circuiters”, which temporarily suspend stocks that fluctuate by more than 8%.

However, these initiatives are still insufficient to cope with technology that is evolving much faster than regulators.

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