Algotrading – NOT trading in Algae

So, it’s not algae trading..

A few years back, I first heard the term Algo trading. At first, I seriously thought it had to do with the trade in Algae.

It is not.

Algo trading, also known as Algorithmic Trading, Black box trading, or automated trading, is a new kind of “animal” in the world financial trading venues.

It refers to the use of machines, or more precisely computers, to trade in the world market with little or not human control, aside from programming the algorithms that makes the decision when, how much, and what to buy and in which markets.

That’s more in the correct direction of what Algo trading really is

For many years, the financial markets of the world depended on the will of human beings to operate them, use them, and shift money around electronically according to whim, financial equations, or plain dumb luck.

Not anymore. A Hungary born entrepreneur by the name Thomas Peterffy, came up with the idea to let a computer talk to the Nasdaq (the Biggest stock market in the world, located in the U.S.A.) directly, thus allowing for a massive number of deals to be carried out in great speed using an algorithm designed to allow the computer take some of the decision making reserved previously to educated, yet somewhat slow, human beings.

This was the start of a revolution. Computers are dumber than humans in many ways (for now), but are incredibly faster. So fast, that at this point in time, algo trading companies are aiming at exotic new methods such as quantum computing to try and beat the delay caused by distance between countries. (so they can execute orders faster than the current optical fiber technology allows them to do)

Yes, it sounds crazy, but it’s true.

However, the main and foremost cause for the creation of algo trading was a very human one – greed. The new algo trading machines allowed for massive volume of trading never done before. Like gigantic swarms of bees working all at the same time. This is very very dangerous for global economies.

Why? Moving around massive amounts of funds, commodities, or securities means that this kind of trading changes prices of currencies, can make or break companies (big and small), and cause political instability in many occasions. Computers don’t care, remember? and the people who sent them to work, prefer to look the other way (at the mountain of gold, or cash) rather than contemplate possible consequences.

The inventor of this method, made about 5 Billion dollars from it, but now understands the genie he let out of his bottle. Today, about 60% of the financial trading in America is estimated to be done by machines, and it won’t stop there, since it’s a race. These computers helped drive the cost of trading down to merely cents, and the more trade done, the more the algo trading companies make money (per each trade, regardless if it ends in a loss or a gain for the customer).

However, there are other concerns, the biggest one is that once one big network of trading computers crashes, or sells in big volume, other networks will follow suite and bring the market crashing down.

I’m thinking more towards Skynet, as more and more networked computers work together, an intelligence is bound to appear at some critical point, don’t you think…?

 

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