Computers To Replace Equity Traders
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Firms are employing more mathematicians on their trading desks, replacing the last bastion of traders and dealers.
According to a report by the BBC, fundamental research and human experience are quickly being replaced by algorithmic formulae. In what is fast becoming a trend, PhD mathematicians, and their complex computer programs, are increasingly sought after for their skill set and expertise in risk management.
Firms are employing more mathematicians on their trading desks, replacing the last bastion of traders and dealers.
According to a report by the BBC, fundamental research and human experience are quickly being replaced by algorithmic formulae. In what is fast becoming a trend, PhD mathematicians, and their complex computer programs, are increasingly sought after for their skill set and expertise in risk management.
Gifted mathematicians and statisticians are employed to identify trends and movements, with the data subsequently fed into a formula that is able to trigger buy/sell actions that are generated by powerful algorithms. So powerful are the programs that strategies can be changed in just a matter of seconds.
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Known as high-frequency trading (HFT), such quantitative trades have holding periods of just a few seconds, compared to traditional trading tools where stocks can be held for days.
According to industry players, two of the largest HFT firms, Tradebot and Getko, contribute to 15 to 20 percent of all equity trading in the United States alone. In a recent government-supported survey, The Future of Computer Trading in Financial Markets, it was found that between 30 to 50 percent of all equity trading in the UK was conducted using HFT.
The research found that HFT helped reduce transactionary costs and “generally improved market quality.” However, it also warned that with artificial intelligence on auto-pilot, feedback loops due to algorithmic trading can lead to significant market instability in certain circumstances, and that a normalization of large-scale deviance can result in catastrophic consequences.
Perhaps the most striking statement from the report is the conclusion that is it “reasonable to speculate that the number of human traders involved in the financial markets could fall dramatically over the next ten years. While unlikely, it is not impossible that human traders will simply no longer be required at all in some market roles.“
David Schwartz, a stock market historian, believes that HFT has created unnecessary volatility in trading markets.
[quote] “I believe certain types of HFT cause a great deal of damage. I’ve seen too many instances during the recent sell-off where a sudden spurt of frequent trades has sent share prices bouncing down,” Schwartz said.[/quote]Others argue that the fundamental problem lies with mathematicians who simply do not understand markets.
Shunsuke Nishmo, general manager and head of trading at Daiwa SB Investments sounded a note of caution about the growth of HFT. “It could provide more liquidity, but it does not mean that everything will work out nicely. We should not blindly believe that they are our friends,” Nishmo said.
