Patrick or better known as Fat88trader, posted an interesting article about algorithm trading. Reading his recent posts gave me the feeling that he is disturbed by algo trading. Being a veteran trader in the Singapore Futures market, he has vast experience and can speak the reality better than anyone. Through these 2 posts (here and here), you can see that algo trading is making life difficult for the professional traders.
Quoting from his 2 posts,
“Spreaders and Scalpers blamed the Algos, they are most affected by the advance in computer technology, losing their most important edge, “speed”. Short term traders are increasingly finding it difficult to survive, the Algos distort the market. I believe it’s still the big boys who are able to control the market and very efficiently with their speed and size to pulverise the small time traders.”
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“Scalping is getting very tough, very tiring especially when many of your opponents are powerful machines with plenty of muscle to push the market in their favour. The machines distort the scalpers with their speed in putting and pulling out orders, sometimes huge orders to bully the small traders. Trading hours are long now, thus making the lives of short term traders more miserable. Volatility reduces as the Exchanges extend the trading hours and traders trade more incurring more comm.”
Back to the article he recommended. It was written by Donald Mackenzie, titled “How to Make Money in Microseconds”. I have extracted 2 paras from the article which I find it disturbing myself.
“In an attempt to get around this problem, big institutions often use ‘execution algorithms’, which take large orders, break them up into smaller slices, and choose the size of those slices and the times at which they send them to the market in such a way as to minimise slippage. For example, ‘volume participation’ algorithms calculate the number of a company’s shares bought and sold in a given period – the previous minute, say – and then send in a slice of the institution’s overall order whose size is proportional to that number, the rationale being that there will be less slippage when markets are busy than when they are quiet.”
There is a belief that being small is an advantage where a you can get in and out of position fast. With algo trading which can complete orders in milliseconds, big institutions are less impaired by immobility. It would probably be more difficult to spot institutional selling or buying in the future, especially when they can do it unknowingly over a period of time.
“A spoofer might, for instance, buy a block of shares and then issue a large number of buy orders for the same shares at prices just fractions below the current market price. Other algorithms and human traders would then see far more orders to buy the shares in question than orders to sell them, and be likely to conclude that their price was going to rise. They might then buy the shares themselves, causing the price to rise. When it did so, the spoofer would cancel its buy orders and sell the shares it held at a profit.”
Apparently, it has turned out to be a warfare. Just like the introduction of radar in military use, aircraft and ships began to develop Electronic Counter Measures (ECMs) to spoof radars. Thereafter, ECCMs came about to counter-counter the ECMs. It just adds up to the complexity. Algos would probably eliminate human trading. There would be algos to defeat algos. It has become a muscle game and you always win when you are big and have the financial backing. And that is the fact throughout history.
Is the trading edge that you have enjoyed over the years disappearing as algo trading become dominant?