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Market is dominated by computers?

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Tyler Durden

Tyler Durden

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I read somewhere today that said about 80% of the trades in the market is done by computers. Then I found the following article, which said:

Global markets are going up and down like a yo-yo, stemming from uncertainty engulfing the US and euro zone, but there other factors involved in the heavy turnover in equities markets.

ASX chairman David Gonski made a very important point at a lunch speech yesterday when he said high performance trading had affected the way people look at investing in companies. He said that high performance trading meant the average shareholder stays for 20 minutes in a company.
Click to expand...

http://www.smh.com.au/business/turb...-wild-moves-20110811-1inuq.html#ixzz1Uifudu4Q

It all seems pretty amazing to me, so I was wondering if anyone knows even a bit about how it works? Is it as simple as giving a computer instructions like "buy if SP reaches x, sell if SP reaches y"? Or is it a helluva lot more complicated than that?
 
Tyler Durden said:
I read somewhere today that said about 80% of the trades in the market is done by computers. Then I found the following article, which said:



http://www.smh.com.au/business/turb...-wild-moves-20110811-1inuq.html#ixzz1Uifudu4Q

It all seems pretty amazing to me, so I was wondering if anyone knows even a bit about how it works? Is it as simple as giving a computer instructions like "buy if SP reaches x, sell if SP reaches y"? Or is it a helluva lot more complicated than that?
Click to expand...

Certainly more complicated.
 
Tyler Durden said:
I read somewhere today that said about 80% of the trades in the market is done by computers. Then I found the following article, which said:



http://www.smh.com.au/business/turb...-wild-moves-20110811-1inuq.html#ixzz1Uifudu4Q

It all seems pretty amazing to me, so I was wondering if anyone knows even a bit about how it works? Is it as simple as giving a computer instructions like "buy if SP reaches x, sell if SP reaches y"? Or is it a helluva lot more complicated than that?
Click to expand...

It is a lot more complicated than that. Look up high frequency trading on wikipedia or something.
 
You have no idea.

Yeah - it's really really complicated!

I asked Jeeves about it, and it didn't even know - go figure.
 
I'd be curious to get the real figures on trade driven by automated systems vs actual people (not fairfax media embellishments).

I once had the opportunity to attend a presentation where a quantitative analyst spoke. He designed computer trading systems for Macq bank that would trade based on algorithms he and a team created.

It was all very complicated stuff (I didn't understand half of what he was talking about - very technical ;) ).

However one thing I still remember him saying that really struck me was :

"You don't need to design a trading system that is right 100% of the time, 51% of the time is enough."
 
Tyler Durden said:
It all seems pretty amazing to me, so I was wondering if anyone knows even a bit about how it works? Is it as simple as giving a computer instructions like "buy if SP reaches x, sell if SP reaches y"? Or is it a helluva lot more complicated than that?
Click to expand...
Generally it involves the use of complicated mathematical models, which have the intention of predicting future price action. A good example is 'statistical arbitrage'. This is when the people at the fund attempt to find statistical correlations between different securities, and use any correlations they find to provide predictive signals.
As an example, they may discover that a rise in the oil price correlates with a rise in the wheat price 1 day later (which could be due to a complicated causative effect). They then program the computer to buy wheat when oil rises.
Of cause this then reduces the effect (the fund itself is pushing the wheat price up in response to the oil price), until the lag is too small for the trade to be effective. They may then scrap this model, and find another one.
Of course the models tend to be much more complicated than this (these funds mostly just hire the best maths men they can find), and may involve multiple inputs with complicated time relationships.
 
davede said:
I'd be curious to get the real figures on trade driven by automated systems vs actual people (not fairfax media embellishments).
Click to expand...


I think thats a very blurry line there. At the different ends of the spectrum are:
0 - Guy buying some BHP shares thru commsec on his lunch break
10 - Black box Computer program trading index futures via algos.

What about a fund manager liquidating a position? He gives the order to a broker to sell over the day. The broker then puts the sell order and limits into an automated algo then goes off and has lunch. Sure that automated but has a human higher authority overseeing it.

Another example would be a hedge fund decides a stock is good value given an announcement. They won't be buying with point and click, probably a buy algo that is designed to eat any supply without pushing prices up too much.

Big money that moves markets ain't point and click. Though most mindless algos are doing some kind of arb or pair trades that won't influence stock direction.

Dominated by computers yes, but still with the human element. (still a few years away from skynet i reckon)
 
If you want a book on the subject that I found I couldn't put down
Grab this.

The quants.gif
 
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