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Bots in Financial Markets

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Programming a simple trading algorithm is within reach to any person familiar with use of computer.  Once done, it takes as little amount as $50 from the credit card to start trading the algorithm within 5 minutes in live account even if the person has no previous trading experience.  Globally, billions of people qualifey as computer users and having $50 or more available from credit card or bank account, so … basically, billions of people can easily get involved in computerised trading. It’s easy for an average person to programm his/her computer to trade millions of dollars daily in his/her $10’000 account while the account is out doing something else.

This was not possible 10 years ago. This was not reliable 5 years ago. But, it’s all possible today and this new reality is here to stay. Needless to say, this new development has transformed markets … This new reality is far from what has been described in books. It just evolves and goes on … and will find it’s way into books in the next few years or so.

As always, professional institutions have taken this much further — computers post bids, run complex price analysis algorithms on tick-by-tick basis, solve the “problem of latency” [measured in nanoseconds] … More important of all, the institutions have invented new ways how to profit through use of technology.

There are a few side-effects and Orwellian way is live and kicking again in financial markets. At least temporarily. One side effect is that, effectively, computer analyses supply-demand data and places bid/ask qoute. How far is this from initial NYSE way of market-making where a human decision was involved in each bit of trae information! Why Orwellian? Some still gets pieces of information before everybody else gets it — enter so called “co-location” and “flash qoutes”  …  it’s still a way to go to get to a level playing field.

A few specifics of the new computerized market reality: Joe Saluzzi interview to FT. Or, as John Hempton writes on his blog:

Computers fleece clients by forcing clients to pay more when they buy and to receive less when they sell.

And it is clear this happens. We trade electronically at our fund.We were recently trading in a stock with a large spread. I have changed the numbers so as not to identify the stock – but the ratios are about right. The bid was about 129.50, offer was about 131.50. We did not want to cross the spread – so when we bid for the stock we bid $129.55. Within a second a computer (possibly at our own broker but it makes no difference which broker) bid $129.60 for a few hundred shares. We fiddled for a while changing our bid and watching the bot change theirs. We would have loved to think we were frustrating the computer – but alas it was just a machine – and we were people up late at night.

Welcome to the brand new world of financial trading. Redesigned from top-down. Forget what you red in books, or how you did it 15 years ago, try to find a new angle to gain competitive advantage!

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Written by A.S.

August 6, 2009 at 10:38 am

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