the impact of automated trading you gave me really some good thoughts the last 2 days about that as i love to forget there is a section of automated/“computer decidig”-trading.
It is less prevalent in stocks then in forex, but dont make wrong conclutions, it is less prevalent because it simply got skipped in the last few years. Whatever comes in forex was already done in stocks years before. stock market and the principle of stocks is several hundret year old, in comparison, the forex market is only 40 years old. computer trading and computers making decitions was a big boom in stocks in the 80/90 and once people realized it is not going good it got reduced more and more and the big guys went back to good old humans making the decitions.
what i think about it? well id love to be in a market which is controlled fully by computers. why? well, it is hard to predict human behaviour, but behaviour of computers you dont even need to predict at all, you only look at their programming and you will know where they go short/long and what they do in certain situations, then you only need to wait for those situations and act accordingly to earn your money.
it is not needed to predict a machine, it does what you or someone else tell her.
why the machine trading is on its backwards move on stocks is very simple, they are that easily predictable and so undeveloped in combining news and trend (they lack IDEA and CREATIVITY) to make a edge.
In fact can you immagine a market that is completely controled by computers? it would be a flat market no ups no downs, the price would stop moving after a time… the price would be 2015 - 5$ and in 2065 it would be 5$. why? no greed no fear and no creativity/ideas to make the market move.
in stocks, when you can predict what 500million $ are going to do tomorrow you can go against it. it balances it out and the programm will stop functioning (as they all did long ago) its the theory of the perfectly balanced market that every action gets balanced out by someone/something else. computers making decitions onto trading was never banned in stock exchanges smply because it doesnt need to be banned. it doest work and when they tried to make it work, the market, the humans on the other side of the trade (the people with brains and creativity) made their edge and their advante into their biggest disadvante and tricked the money out of them.
'Economy is a control mechanism to control the people. it is made and it is good to be made like this to control the population the people in their actions. thats partially why economy is slowly replacing religion as control mechanism for the people/masses. Machines will never control the people and that is one reason why machines simply cant/wont trade on our behalf.
about china and the asian market and globalization which you mentioned i definately agree with you. the impacts in asia today count more then they did years ago. but theres still a lot of difference. checkout the american and the european market. they move in pair, they copy each other every day. on the other hand you can see the nikkei or hong kong beeing in minus by 2-3% while the dax makes a plus of 4% and the dow making a plus of 2% the same day.
You see Tokyo lost a lot of points the last 5 days, in fact they are again sliding into recession. and here? have you heard anything in the news about it? nope. has the dow acted accordingly? nope, its going up since the nikkei is rockbottoming daily minus 2-3%.
in comparison checkout the DAX, the FTSE100, the CAC40 and other european markets, they all move together the Dow with them, them with the Dow. Simply because our economies are so extremely connected, we are one civilisation, we are the western civilsation the western culture.
only one example: have you ever wondered why Japan is not part of the NATO? why korea isnt part of the NATO? but on the other hand unimportant countries like Albania is? or Slovenia?
Why isnt india in the NATO?
they simply are not part of “the club”, they are not the western culture/civilisation and their economies will never be connected to us (at least not within my lifetime) that they make such a huge impact like europedoes to USA or USA does to europe.
Again, thank you for the thought inspiring post! I do agree with you about the limitations of automated trading, and am very happy about that! :). I didn’t know that it had already risen and fallen in the stock markets.
I quoted the above section because I am not sure I fully agree with that. Computers can be programmed to look at very different things. Surely, the value of stocks, in the final analysis, are based on the actual value of the company that they are a share of? Although the current price is probably based more on perceptions of where the price is going than what it is worth today, will it not in the long run move in accordance with the actual fortunes or failings of the underlying company?
If that is the case then computers can be programmed to follow, and react to, price action, or they can be programmed to analyse the company’s various metrics and data. Therefore an automated system would move the price based on projections of changes in the company’s value in the future? So if some computers predict the companies changing value and others react to price change then surely there will always be movement of some kind?
That does not mean that computers are ever going to dominate trading and become more successful than human analysis, but I am sure they would keep it moving!
It is an interesting thought if one compares this with forex. Ultimately a currency does not really have an underlying specific asset like a company share certificate, it is just a piece of paper or a number in a computer data file (unless the currency is linked to a commodity like the gold standard and silver dollars). Its value may be changed according to supply /demand in the commercial world and/or the total supply of currency by the Central Bank.
It is fascinating to see how currency values relate to a nation’s economic performance when one looks at the euro economies. In pre-euro times the euro countries would inflate/deflate their individual currencies to promote their competitiveness and export levels, but now that they all have the same currency they cannot do that. This actually creates an ironic contradictory impact where manufacturing units are shifted from expensive countries to other cheaper countries whilst the best employees in those cheap countries simultaneousy migrate to those countries with higher salaries…
Technically, the entire market IS “controlled” by computers- if you think about it
And, many guys can tell stories about futures trading where they’d literally be able to pick out algo’s battling one another. So, I don’t agree that the “market would be flat”- that’s not realistic.
It just means that on the faster timeframes, retail traders are @ a unique disadvantage.
i have to disagree with both of you and i think i can deliver you some sort of prove of my theory.
in theory a market that is controled solely by computers without humans trading in it will be flat.
we all know chess… we all know the rules of chess and we know that there are ifinite possibilities which can be calculated by a great mind and calculated even more by a good computer; an algoritham.
we all know that the best chess players loose against the best chess computers. indeed thats very true since few years (when the first chess computer came up it took 40 more years that the best chess computer managed to beat the best chess player (back then kasparov))
so thats all good and etc. but…
but…
but…
chess is a game which can only be won by the falirue of your enemy. you can only win when your opponet does a mistake. when both opponents play a perfect game, the game will continue till infinity and end in a remé/draw. always, it will always end in a remé/draw where only the 2 kings are left. it will never show a winner.
the same is true if you put 2 computers of equal calculation power against each other to play chess, the game always ends in a remé/draw, theres never a winner.
now, in chess you can win only by taking advantage of the mistkae of your opponent. that sounds familiar to me, same goes for stocks and forex… on every trade theres a counterpart which takes the opposite position, in every winning trade theres someone who is loosing the exact same ammount you are winning (take aside spreads and fees commisions)
so in order to win on stocks and forex you have to take advantage of the mistakes of others.
now immagine 2 computers doing that very same game, two computers calculating the game of trading to the maximum of their computing power. they will both always come to the same conclution, they will both sell at the same times they will both buy at the same times…
the result is a remé/draw where after a certain amount of time the market simply collapses.
most alghorithams banks and funds used in the 90ies in stocks were “followers” they were programmed to follow a move. a stock goes up 5% they initiate long positions, therefore pushing the stock up more, other computers following them. they stay in the position as long as it goes up. as long as it goes up other computers will join and put more long positions into that very same stock… the result is that all the money that is available to all those computers combined goes into that one single stock, flattening all other stocks to woth of 0 and this one single company will be worth all the money that exists on this planet.
you see where i am going here? game over = remé/draw. the market is flat. all other stocks are 0, this one isnt moving anymore as all computers are in this very same stock and all the money is sought into that one stock forever… untill there comes a human who pulls the plug of the computers.
how do you pull the plufg of such computers without actually putting them off elecricity. its very easy. you know their programming ypou know what they are teached to do. so by a 5% up move they go long, by a 5% down move they go short.
so how do i take advantage of that knowledge? very simple: you invest enough money (if you have enough) to shake the stock (here im reffering back to PipMeHappy’s post about Jessy Livermore and manipulating the markets) 5%, what will follow is that all the computers which are long on that stock will close their positions… then we go rockbottoming till the stock is 0.
see how easy it is to manipulate a computer which is programmed to do something? how can you give advantage to one of the 2 chess computers which i mentioned above? very simple!: CHEAT! take one figure away from one of the computers, and the other computer will win every single match, there wont be any remé/draw anymore.
Unfortunately i have not enough money to shake a stock 5% down. and unfortunately i do not have the knowledge to know where a computer is deciding about a position of a stock and where not.
but you can bet if i ever have 20-50 million and i find out that one specific stock is beeing held by 60 or more % of hands which are controled by computer alghoritams then you can bet that i will throw all my money in short positions untill i reach the point where the computers see a sell signal, and you can bet i will make 5 billion out of the 50 million i threw in.
i know this is a very simplified example above but i couldnt think of any better this late at night.
computers can give you an advantage in trading (and when i say computers i mean computer/algoritham suported trading to a human decider) but computers itself will never trade and if you listen to computer only, without having human thoughts and ideas and critiques and mistkaes, fear and greed combined to it, the market will stop existing. because the only thing in this world that moves a market is greed and fear, nothing else, everything else is just a trigger to either greed of a human or a trigger to his fear of loosing…
great read Pip! and it supports what i gave as example above. and i completely agree to what you said in a earlier post. that the advantage/edge of humans is that we focus on longer term trades which combine more factors then only technical analysis.
Good! …otherwise we wouldn’t be forced to think more deeply about these things and would have nothing to talk about! In the same way that you argue that a computerised trading world would be flat, it would also be totally quiet since us humans would have nothing to comment
I still think you are applying a too narrow input to these automated systems. I do not think that such programs [I][B]only [/B][/I]consider price movement (if they [I]do [/I]then maybe I have a new career idea here! ). I still think it is important to consider the value of the underlying asset, the company whose stock is being traded. In an emotion-free market there would have to be a definitive determination of the underlying value of a stock in order to compare this with the current price so that a computer could initiate any kind of action.
If computers [I]only [/I]focus on price movement then I think you are probably right, but I do not think it is a big step for the same computers to also be programmed to evaluate and identify oversold/overbought price levels when compared with the calculated value of the actual asset. Therefore there would come a point in price development where the computers would spot a divergence between value and price and change direction and exit their positions and enter something else.
Forex is maybe in many ways essentially a “zero sum” market where what is bought is also sold, but surely stocks are different? Is it not possible in theory that all shares could rise in value and the entire stock market value increase if all companies increased their value? Companies can issue more stock and they can buy back existing stock. They also decide their dividend policies. Surely any computer trading system is programmed to analyse more than just the change in price level?
Also, I am not so sure that the entire market is driven by greed and human emotion. Sure, there is a big chunk of the entire market that is volatile and driven by short term motives but there is surely a large core position that is held by vast funds such as pension funds on one hand (who cannot change their positions very fast because of regulations and sheer size) and also small long-term investors that do not even follow the price of the shares on a regular basis.
A portfolio manager has many, many considerations alongside price development. I would have to decide my investment strategy profile on many fronts such as:
what percentage exposure in bonds, stocks, currencies, commodities, etc
what percentage exposure in US, Europe, Asia and which countries within these areas, etc
what percentage in various industry categories, etc
what percentage in govt risk, semi-state risk, public companies, venture capital, etc
My job would not be to buy and sell anything and everything based on a price change, but to re-evaluate my overall investment profile on a regular annual/quarterly type basis and then to seek assets representing the best value within those profile categories - and there is the core, how does a computer evaluate the best [I][U]value [/U][/I]option within a range of investment options and not just follow the [I]price [/I]like the rest of the sheep?
So whilst there is indeed a big enough market that is the domain of the speculative short-term greed/fear driven traders, I do think there is also a much larger core market that is driven by serious analysis of its actual value in the present compared with current price and future prospects. If a computer analyses all three of these factors then there will always be a changing price because current value and future prospects are external inputs to the market itself whereas price is simply the market itself. Afterall, in trading (rather than consumption) buying and selling only occur when participants, whether computers or humans, believe the value of something is different to its current price either now or at some time in the future.
There are some very interesting issues in that article. One of which was, surprisingly, that automated trading significantly contributed to the extent of that move on the CHF NOT by its [U]activity[/U], but by its [U]non-activity[/U] when the systems automatically disconnected from the market and withdrew a substantial amount of liquidity:
“On 15 January 2015, the Swiss National Bank abandoned its exchange rate floor against the euro, resulting in a 30% appreciation of the Swiss franc against the euro in 20 minutes. (2) During this period, the algorithms run by the primary liquidity providers in the foreign exchange market were unable to adapt to the speed and size of market activity. As a result, and in order to avoid an excessive accumulation of risk, firms’ algorithms were stopped from interacting with electronic trading venues (either via automated ‘kill’ switches or manual intervention). This withdrawal of market-making contributed to an evaporation of liquidity, thereby amplifying the effect of the initial news on the Swiss franc exchange rate.”
It is interesting that this committee, whose topic is financial stability, does not talk about limiting or banning the use of algorithmic trading rather is it only concerned with the institutional ability to identify and properly control its risk parameters. Liquidity is a good thing, but self-propelled, rapid and unlimited price action is not.
Thanks Manxx, indeed it.was pulling the plug on those systems that took the brakes off and allowes the Swissie to.skyrocket… I liked your comment to Turbonero further up here, about not all buying/selling being done under greed/fear, as long-term speculative (position) trading is much different from the ‘open outcry’, pit-trading style…
Great discussion
I wish the FXMen/Women would jump in every now.and then and join in with their experience…
definately a great topic here and a great topic to talk about.
your post is very wide spreaded and covers several points o i havee to brake it into pieces for a propper answare
Unfortunately i have to put a narrow view on it as if i put up a broad view then id have to write 200 pages on all the details that can be seen in the approach of computer trading
must keep it simple in explanations and i know some of my explanations dont come true good or reasonable enough. to sum it up, my example above was that every programm which is created to do something, there will be humans who are able to take advantage of it. a programm will never outsmart a human brain simply because it is lacking other things. no creativity no critical thninking no fear no hope and most of all no “soul”.
my simple example above only suited to illustrate that every given programm will be outsmarted by a human. In the 90ies the automated tradings were simple followers systems. today they maybe be more complicated and take more things into consideration then only technical anaylises, i completely agree to you! but, no matter how complicated they are, the humanwill again cheat on them and make them “fail”.
a computer has no “winner” gene. even is the computer trades better then any human can do, it changes nothing. the human will win in the long run. why? i showed how the 90ies automated systems got beaten down easily- by cheating of the human. and in the future it will be the same, a human will find a disadvantage, a whole, a weak spot and make the programs not work properly and take advantage of this weak spot monetary wise for him. thereby he will tear down the entire system of those programms and new programms must be developed that beat the human again. it is a game that the machine never will win. it can win over a period of time but in the long run, the human will prevail in all senses and forms.
and again, their programming ans obvious "take this action on scenario “a”, and this action on scenario “b” is what makes them weak as professionals and people with edge will take advantage of this very same programming. it is a fight against time, you programm and a bit time later theres someone taking advantage of the programm and therefore offsetting its edge. the theory of the perfectly balanced markets.
you dont believe me that cheating exists? well FED and ECB and BoJ are cheating the markets since years arent they? stealing worth of the actually distributed money and putting that very same worth into newly freshly printed pieces of paper they then cal, dollars and euros. <- cheating aswell, just allowed cheating
forex is definately not a 0 sum game, it is a minus sum game. why? well, in stocks you find value. i made one big post somewhere like 3 months ago explaining how stocks benefit the economy and society and the growth by creating jobs and value. stocks and the system of sharing stocks (sharing parts of companies to people who have no idea but money in exchange so that people who have idea but no money [possibility] to start their idea is creating jobs and value to the society) is in fact a system created to give edge to a countries economy. as said; by reallocating capital from uncreative old peope to creative young people who have not enough money to start their great ideas that system creats value and jobs.Take an example of apple, facebook, microsoft and all other IT-companies created in USA the last 40 years. all these companies were created by 2 entities: 1. the person with the idea (but without money/possibility) 2. the crowd that has the money but no idea. by bringing them together since 40 years (only IT industry) the USA is the leading IT industry in the world by creating more then 4 million jobs solely in Computers, software and services around computers. creating the worlds biggest companies which rose from only a few years from a garage to giants like microsoft, apple, google etc. these companies having employees which are highly paid jobs, people who buy houses (support real estate industry) people who aquire services (support service industry) and those peple at some point when they grow old even become speculators themselves investing in new stocks and giving new young people the chance to creat their own idea and push their new great ideas in the world.
you dont see such companies in Europe and Asia. why? because USA has a powerfull system that gives their economy the extreme power to creat big things within short ammount of time. Stock exchanged: the relocation of money/possibilities/funds from old a$$es to young enterpreneurs.
(take asside the creation of wealtch through this system that is beeing redistributed back by the stock system to the people who invested into those companies, giving several percent points back to investors every year [in avrage 15% to whoever invested in IBM since late 1960 and thats a hell above average any pension fund or bank account and their interest rates])
on forex on the other hand. you create no value, you create no jobs, you create no interest, you ceate no dividend, you give no chance/possibility to someone with a great idea so he can add to his society by creating jobs and wealth. forex is no system that is made to create wealth it is only an exchange system and gives no surplus to anyone except 2 entities: broker and banks - you pay them fees and commisions. thats all. nothing is beeing created, through fees and spreads actually not only that nothing is beeing created but in truth money is beeing “burned” every year 2% of your money goes on spreads and commisions.
yes you made a great point there but you forgot other aspects. you said a portfolio manager has to do many considerations. but you only mentioned like 30% of his thinking.
dont forget this thinking he is doing alongside of what you mentioned:
i have to do my 5% this year somehow. in my contract they state that if i dont do 5% surplus i get no bonuses
if i get no bonuses i cant buy my new house
no new house my wife will be pissed
wife pissed = life $ux
if i dont do my 5% they will fire me and find another manager
if i do 10% omg then a bigger fund wil try to hire me and ill earn even more!!!
career!!
etc etc
you forget theyre humans aswell just like you and me. humans with wishes, fear and emotions.
have you ever heard of the Go-Go-Funds in the late 1960ies? read up on them and youll see how much emotion driven funds managers can be.
Yes you are completely right about the funds in america. they are the main reason why the Dow Jones is so much more stable as and index then other indexes all around the world. the biggest investors in the dow are funds who hold positions for longer times frames and dont get out that easily. even pension funds managers are under pressure by the stake holders to make constant profit and you know how investors are: its never enough! 5% this year, they expect 7% next year, if you manage 7% then the following year they expect 9% etc etc.
Government regulations in funds: yes they exist but they arent taken way to seriously. You life in USA? if you do then you probabl heard of dellaware by now didnt you? a city which declared itself as off shore tax heaven and off shore location for financial institutions in the middle of the USA. the regulatory there is much easier then it is in new york or boston where the biggest and most funds are/were located. you can see a big boom in dellaware the last 5 years simply because all the funds move their homebase to dellaware out of new york and boston. that way they become offshore funds which are not regulated by the authorities they have been regulated since decades and thereby they can do things they usually are not allowed to.
The same goes for the european union, here the funds move to monaco and the brittish virgin islands to become off shore funds which are way less regulated then in frankfurt, london, paris, madrid or rome.
Greed and fear is present in every single market participant in stocks and forex.
and thats the crutial word. believe. what akes the computer believe? nothing. it reacts, it has no ideas or plans.
about the selective optioning between bonds and other things. if you just look at the last crisis; it started the same way, in the early 1980ies they invented new structured products which interacted with the real estate business and banks/funds bought these actualy good products. with time and noone really taking care and noone paying attention these products have been metaphored into something harmfull for the economy. so the result was that everyone could buy houses even with a 0% margin ut down. then 2008 hapened and the bubble bursted. a bubble created by banks and funds which simpl,y believed in a 30 years old practice to be perfect without reevaluating it every now and then but simply taking it as granted. human failure.
with pulling more and more people into the system and generating more and more profit for the banks and funds (greed) creating bigger bonuses for the managers whoo handled these contracts and practices (greed) without thinking of negative consequences. once the negative consequences hitted the market (fear) everyone only tried to get out as soon as possible, not only that they tried to get out as soon as possible, they tried to CHEAT their way out by blindfolding the public for several months from what is actually happening and thereby only worsening the crisis untill we came into a hard recession and the biggest crisis since 1929 addng more fear into the system.
you are a forex broker right? you remember the Libr and Euribor scandal of the Deutsche Bank and other banks? Deutsche Bank is the worlds leader in forex they have the highest volume of all banks. but they didnt get enough, so they had to cheat their way through by manipulating (greed) the Euribor and the Libor few years ago creating a scandal and getting punnished several hundret millions in fees.
so yes in my eyes theres only one thing that drives all markets: Emotions
and nothing else
greed and fear is seen as 2 harsh words. but they fit. the only difference is that small speculators come out as very greedy because they want to make 50% a month but the big guys dont come up as greedy when they try to increase their yearly surplus from 5% to 7% and thereby doing stuff that is double as risky as the usuall stuff they are doing.
Look at argentina for example. several funds invested in argentina (not important right now how or what they invested) simply because argentina is a BB country and the yields, the interest was looking attractive to them. they invested into a country which has a track record of getting broke every 20myears.
so the country got broke and the funds did not have a loss (they speculated against argentina) so now they earned several billions from argentina. great isntit? but… argentina isnt paying. why? how can you pay when you dont have?
uncollectables dont exist only in private households. if a person owes someone 100.000 but he has onloy 2000 how can he pay? he cant, he simply cant, he isnt the FED to cheat his way out and print 50 billion each month to pay off people who invested their work with couloured paper
Emotons is what makes this world go around at all. if we all were roboters we wouldnt need any iphones, a LG whatever for half the price would be sufficient. we dont need ferraris, a volkswagen is enough. we dont need houses of 250 square meters, and we wouldnt desire things that we actually dont need. air, food water, thats all we need, the rest is emoton based “i want this” and this “i want this” is what makes the world of finances go round.
computer simply cant cope with that, they cant cope with “i want this” and never will. and as long as there are humans in the markets who say “i want this” there will be cheaters and machines are easy to trick, and not only easy but in the human nature it is their NEED to trick machines because in truth we all hate machines and theres nothing bad about tricking or cheating on a machine, while theres a lot of bad cheating or tricking a other human beeing;)
trust me, ifi ever come to the possiblity to trick a machine in financial ways in stocks and trading, i definately will do it without regretts, and i will brag about it to everyone who wants to hear it.
It is a great thread here definately! and you are right, youve seen something i didnt see a few days ago. it is really quiet this week and theres definately something brewing up as it seems! right now not much is moving im watching all day.
Yes im over it, losses hapen. was only pissed yesterday and made the stupid decition to not trade yesterday. the result of thatb stupid decition is that i missed a entree on Brent Oil and right now it is running away from me and i have to chase it D’oh! im sitting on hot stones waiting for a good reentree on Brent again for a good long contract of 500-700 pips hopefully.
and youre not talking nonsense at all, your post give good ideas and -at least to me- critical thinking to rethink things ive been giving thoughts about long ago and reevaluate my old perspectives with fresh knowledge.
so keep them up, a good conversation nowadays is hard to find
I do agree with you about the limitations of automated trading, and am very happy about that! :). I didn’t know that it had already risen and fallen in the stock markets.
