High Frequency and Robot Trading

Robot Trading High Frequency TradingHigh Frequency Trading (HFT) has been the buzz word of markets for a number of years now. Throughout this year, in Australia, we have seen this gain great traction and more headlines.  According to the regulator. HFT represents 30% of the turnover in the equity market (up from 3-4% in Feb 2010) and as much as 65% in the US.  This surge in growth has provided much needed liquidity (phantom liquidity, depending on your view). In what has become a thinner market, but what are the side effects of this kind of trading?

At its core, HFT looks for small price anomalies between the various markets (remember, back in the day. There was only one market for stocks) which is far broader now – I read the other day that there are as many as 18 different places to trade BHP.  On one side of the argument. There could be a case for this leading to greater market efficiency.  On the other, exploitation of the more traditional market place. By those with better technology and systems (Free market economics or Darwinian Theory).

The concerns, of course, generally are expected with any new addition to markets.  One major area is regulation.  One of the benefits to our market in Australia, is of course. The stringent regulation.  Often, with newly evolving products. New policies and policing need to keep up with product R&D and this area will be no exception.

There has also been much talk of HFT being responsible for “flash crashes” in the market – we have seen this already in the US.  A flash crash is where a series of orders perhaps trigger levels in the markets – prompting sell offs, or price spikes. Triggering other latent orders and exacerbating the price move further.  Back in the day, this was referred to as stop hunting – and given the generally higher levels of leverage in markets these days. Trader tolerance for price moves would seem to be thinner.

So as a retail investor or trader, what can you do?

The other area of sizeable growth has been in the space of robot traders.  Robot trading in its essence, is where your trading plan – the entry, exits (profit and stop) are coded and then applied to markets. When the trade criteria is hit, you will automatically enter the trade and your position managed. Based on your own criteria, position size and so on.

The massive advantages to this approach to markets (and no doubt why this type of trading has gained popularity) include:

1)     Totally passive strategy that can be working 24 hours a day

2)     No emotional involvement in the trading decision

3)     Consistency in your trading plan

4)     You can back test your plan in exactly the same way as you will use it

5)     Is especially useful on the big liquid markets (FX and indices)

6)     Ability to run multiple separate strategies concurrently

7)     Can in build a safety valve to manage risk

For many, this may seem too hands off, which it is, although ironically offers a greater level of discipline and control.  What’s more the coding side is easier than many think. Through the development of platforms.

Personally, this was an area until this year, I had been closed to.  However, having been around this type of trading for a while now, I have become a fan.  Why – well the advantages are pretty clear – and the work is on the front end – do it once, do it well, and away you go.  The biggest break through, is it is simple – if you can describe your plan, it can be coded!

As a result, we expect to see great growth in this space. Particularly across the FX markets.  Why – because value is becoming an increasingly important variable in the current economic environment and this type of trading represents exactly that – massive value.   What’s more, technological developments will continue and make this process even easier, for those that embrace it.

So add value, simplicity, convenience and greater technology to support this. And you have a powerful case.   We will be rolling out a support program for our clients to help them grow into this space – more on that next year.  Key thing though is to be up to speed with where this is going and why.

I was talking to a trading buddy of mine the other day about this subject. And the appropriate use of technology in trading – the quote was simple – “it’s not You vs Machine and it’s not You versus Market – the reason most people struggle in the trading arena is because it is You vs You – Robot Trading removes the obstacle – You – from the trading decision and that is why it works”.

Food for thought and bringing to a close our 12 days of Outrageous predictions for 2013 – some may be right, others not – the reality is that successful trading is not really about predicting what is going to happen. It is about being confident and disciplined enough to respond to what is actually happening!

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