Will Algo Trading Take Over?

Was just talking with a few people from work, who have been in S&T for a fair amount of time. We seem to agree that algo trading is the way to go in the near future. Computerization appears to be the trend, since it's cheaper and faster. Banks already spend huge amount of money on building their algo teams.

However, is it possible that algo trading is really going to "take over"? Are regulations likely to backlash?

 

Wolverine19x89 will "take over" trading in the future. Watch your back.

If your dreams don't scare you, then they are not big enough. "There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.
 

What credentials do people have? The ones that administer the algorithmic trading. PhD Mathematics; i.e. quants?

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.
 
jesus of nazareth:
mhurricane:
What credentials do people have? The ones that administer the algorithmic trading. PhD Mathematics; i.e. quants?
Agreed. Most of those people are programmers that don't have a good understanding of finance.

They don't need to, they're not interested in fundamentals, just analyzing relationships / trends.

 
bananadine:
there's a lot of trading that a) algorithms can't replace
[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 
trazer985:
There is no system you can do without an algorithm that I can't do with, as long as you are using only information from markets (i.e. insider stuff or un quantified factors).

Feel free to think of one though.

Not strictly true. A couple years ago, Jim Simons claimed that no single signal Rentec used was profitable after transaction costs. You need to use multiple signals at once to narrow things down to net profitable trades.

Plus, there's data quality: a ton of backtested strategies look good because someone made a typo in 1992.

Cleaning data is a fixed cost, testing strategies in the real world is cheaper if you're already running multiple strategies at once, and most good quants have great instincts about what to investigate.

So it's only true in a really limited, technical sense that any algo strategy can be duplicated.

 
MrBroadway:
it already has 70% of trading is Algo.
I concur.
jesus of nazareth:
Agreed. Most of those people are programmers that don't have a good understanding of finance.
The underlying mathematics and coding far exceed the required knowledge of finance. They deal with variables (i.e. financial) in which they need not fully understand the minutiae but as charlie09 states, "...analyze the relationships / trends." They can then infer about the nature of the variable without the specifics of its financial nature. The same goes for coding with these variables. It’s a reduction of human trading processes and concepts that get complied into various strategies and are executed far more efficiently albeit more costly.
melvvvar:
what kind of sales and trading you guys do? used car?
laugh out loud
Who Am I? | See what GMngmt is all about at About.Me
 

Quants are not programmers. I should know. While quants for the most part can indeed do a lot of specialized programming, what they really tend to be are highly analytical/research-oriented people, mostly with higher analytical degrees. Trading at it's heart is highly quantitative (derivatives, pricing of exotic products, rates, options, etc). I don't think it's possible to separate finance from quants, not anymore. Everyone has some sort of trading model/strategy.

Algo trading is simply codifying the decision making process that lots of traders use, cutting away the middle-man.

Yes, I think it will take over - manual traders are simply too slow to respond to market movements nowadays.

But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely. And Rhaegar died.
 
Anomanderis:
Quants are not programmers. I should know. While quants for the most part can indeed do a lot of specialized programming, what they really tend to be are highly analytical/research-oriented people, mostly with higher analytical degrees. Trading at it's heart is highly quantitative (derivatives, pricing of exotic products, rates, options, etc). I don't think it's possible to separate finance from quants, not anymore. Everyone has some sort of trading model/strategy.

Algo trading is simply codifying the decision making process that lots of traders use, cutting away the middle-man.

Yes, I think it will take over - manual traders are simply too slow to respond to market movements nowadays.

I agree with this somewhat. But every quant job i've seen posted, requires pretty strong coding skills in C++, C#, Java. Of course, I imagine that any masters or phd student in the hard sciences/math/econ have picked up some programming. But at most hedge funds and prop shops, there isn't much of a distinction between a quant and a programmer. Software developers, on the other hand, are their own separate group, but nowadays all quants must be able to write their own algorithms after doing the proper research and backtesting.

 
Brady4MVP:
Anomanderis:
Quants are not programmers. I should know. While quants for the most part can indeed do a lot of specialized programming, what they really tend to be are highly analytical/research-oriented people, mostly with higher analytical degrees. Trading at it's heart is highly quantitative (derivatives, pricing of exotic products, rates, options, etc). I don't think it's possible to separate finance from quants, not anymore. Everyone has some sort of trading model/strategy.

Algo trading is simply codifying the decision making process that lots of traders use, cutting away the middle-man.

Yes, I think it will take over - manual traders are simply too slow to respond to market movements nowadays.

I agree with this somewhat. But every quant job i've seen posted, requires pretty strong coding skills in C++, C#, Java. Of course, I imagine that any masters or phd student in the hard sciences/math/econ have picked up some programming. But at most hedge funds and prop shops, there isn't much of a distinction between a quant and a programmer. Software developers, on the other hand, are their own separate group, but nowadays all quants must be able to write their own algorithms after doing the proper research and backtesting.

I see your point. It all depends I guess. There's a new "job description" called Quant-Dev, where you're a programmer who plays with algorithms and stuff, but not quite. What we now refer to as Strats (strategists) are the core financial Quants, and most of them have reasonable exposure to finance.

You're quite right - these guys indeed have a lot of exposure to core programming, unsurprising since the entire business is meant to take the core decision-making out of human hands/minds.

In the Algo-houses, my experience has been:

Algo-trader (formerly a quant) >> Quant/ Strategist >> Software programmer.

Algo Traders tend to make the decisions, Quants/Strats basically analyse data and present their findings to the Trader, then the programmers.... well, they program.

You still tend to have one or two traders as well as risk guys in the team to monitor PNL and stuff.

But Rhaegar fought valiantly, Rhaegar fought nobly, Rhaegar fought bravely. And Rhaegar died.
 

Fantastic video. Wilmott seems like kind of a tool, tho obviously drumming down the math. Derman knows what's up. That software-gone-oyster guy, yikes, broken man. Was it his role in the crisis or just the culture? Perhaps the former blamed on the latter. Very well done tho.

I saw it ultimately as all three coming to terms with their purpose. Which is difficult b/c they're all more scientifically driven than monetarily like the rest of the street. But must accept that their talents lead away from their roots. Derman went to say that the models too quickly detach from reality. In the eyes of the beholder. We are all here for the money.

Derman pointed that modeling and quant roles are transitioning to algo. Do you understand the distinction? Flat numbers to more processes. Thus we are approaching limits of artificial intelligence, which won't advance as rapidly as science previously has in finance (don't see how the gov won't have the edge). Human creativity remains an edge, not to mention the current algo backlash. I think that future trading will indeed require more engineering conscious minds than before, but the heart will still rely on DEALMAKING.

 
Best Response

As long as liquid markets use a FIFO (first-in-first out) fill allocator, the biggest advantage algo trading offers is execution speed. Certain shops have implemented microwave radio towers that offer ~8 microsecond execution, which is basically the physical limit (think the speed of light). This is not a sustainable competitive advantage.

I believe that as this speed becomes more widely available, discretionary traders (non-algo) will regain a big edge. Half of my office are algo guys, the other half discretionary - the algo guys are smart and can talk statistical edge, but they really can never explain the inside-outs of the market as well as the fundamental guys. You have to understand that the whole point of algo trading is to be able to cover a wide range of markets with as little effort is possible - I don't believe algo guys will be able to keep an edge over guys who follow a few markets full-time.

I'll concede that John Arnold closing Centarus discredits a lot of what I've said.

 

Extremely unlikely. We've been doing more and more "old fashioned" block trades where traders are willing to commit capital in order to avoid being seen in the market and gamed by HFT algos. Traders also provide market insight that computers can't provide. At least not yet.

So, becoming a trader is still a viable career option. That said, you don't need a CFA to become a trader.

 

Surivorship bias/news is reported, old news is not.

Plenty of conventional shops around, just the search engines will find the algo ones. Algo is hip, but unless you love it, is rapidly become a very saturated market. Lots of big names losing big money in it as well as others making it. Not hard to guess who they're making money off.

Main ones i've seen are energy and futures markets, but there will be ones everywhere.

 

this question and like-minded questions are being asked with ever-higher frequency on wsoasis. the question itself is to general to answer and you'd have to know more about financial computing to ask a reasonable question. But to answer the general question: don't know. but as of yet, the technology to do so isn't known to exist (and with philosophical evidence some people don't expect it to ever exist).

 

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