Isn't Algo Trading paradoxical?
I know it's quite a random question but I have some friends that switched to Algo Trading from engineering roles. They've told me how they're trying to find market inefficiencies and capitalize on that.
However, isn't arbitrage not possible if markets are efficient? Don't you think that, when algo trades make up about 95% of total trades, markets are going to be quite efficient?
I guess my question is: once most trades are algorithmic, will there still be arbitrage?
Accidental double post because I am a dumb chimp
Yes there will be (alpha), but it will be harder and harder to get. It will turn into a competition of who can build the better models/algos.
If you want to talk about arb specifically, arb barely exists now if at all. Having recently gone through new hire training, my trainer was convinced it doesn't exist anymore. However, algos can achieve alpha from many other ways that are not arb
You know things are already at this stage when the deciding factor can boil down to the physical length of the cable connecting your algo to the exchange. This is a rush to the bottom but like all human endeavors, this is a bottomless rush to the bottom. When things are so efficient they can't measurably get any more efficient the brightest will find another unrelated edge and overtake the dumbest and humanity will keep on going.
Yes, I was also thinking maybe they'll develop models to read what other competitors are doing? Also, stock prices depend a lot on the leadership of the company so they could start tracking that (sell when Elon musk posts a dumb tweet, buy after, etc...)?
Ultimately, as long as there are price changes hedge funds and algo traders will eventually make money if they make the right model/algo.
Know some people that work in this space. Think about market efficiency as having effect on a certain strategy, dataset, scale, etc.. Certain approaches become commoditized but quants can keep looking for more sophisticated strategies and esoteric datasets to generate alpha. And at the smaller scale, there will always be opportunities that massive funds can't really capitalize on–see the performance of medallion vs the public rentec funds.
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