Automated Trading Systems?

Investments, gold, currencies, surviving after a financial meltdown
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NoMansLand
Posts: 44
Joined: Mon Jul 11, 2022 10:46 am

Automated Trading Systems?

Post by NoMansLand »

I have seen many different people make the point that there are, in some cases, two generations of traders that have never operated outside of fed supported markets. On that same timeline, since the '90s algorithmic trading has developed and grown into a significant force. It occurred to me that this means these algorithms have also been influenced by the numbers from that same environment.

Could part of the disconnect between markets and reality be that a large part of the system lacks a "gut" to interpret the conditions on the ground? A bunch of AI Vulcan's reacting to news headlines? I ask this here, because I don't have any experience with these systems. What level of autonomy are they given to execute transactions? How much do the current generation of traders rely on the guidance they give?

NoMansLand
Posts: 44
Joined: Mon Jul 11, 2022 10:46 am

Re: Automated Trading Systems?

Post by NoMansLand »

I am honestly interested in the opinions of the professionals on this topic, and while there have been many views, sadly no replies. I would like to add, as evidence of the chaotic influence of these systems, the following story. This is taking place as I type.

https://www.zerohedge.com/markets/stock ... pausepivot

The first comment at the bottom of that article struck me as very succinct.
"Someone whispers and billions are made or vanished in seconds?

This is why the system is broken."

Higgenbotham
Posts: 7436
Joined: Wed Sep 24, 2008 11:28 pm

Re: Automated Trading Systems?

Post by Higgenbotham »

I only know about automated trading systems and what they do based on competing with them.

Below is a quote for a stock that I just took off my platform. I traded this stock a few days ago.

Image

With the advent of zero commission trading, my broker sells my orders to firms that compete to fill the orders. They might use slightly different language to describe that process but that is what they are doing. They will get paid by these firms.

Let's say in the quote above that one real trader/investor is trying to sell at the above ask and another real trader/investor is trying to buy at the bid. The spread is 18 cents, or $18 on 100 shares.

If I put a market order in to buy this stock, the trader/investor who is trying to sell will not get the fill. The benefit of the spread will not go to an actual trader/investor in other words. Instead, a machine that is programmed to optimize its short term profit will sell from their inventory to me for slightly under the ask and cut the trader/investor out of the process. Then if another person comes along with a market order to sell a few seconds later, that same machine will then try to buy it from them at slightly above the bid and pocket say 14 cents, or $14 per 100 shares on both sides of the transaction in a few seconds time.

The quotes only show bids and asks of 100 shares or greater. If I want to get a fair price and cut the machines out, typically what I do is put multiple bids in one at a time to buy at just over half of the spread, say 110.67. You have to keep the orders small enough that the machines don't adjust prices because of your order. 20 or 30 shares would typically be the max.

The machines seem to use some kind of trend following system and they are about as smart as cockroaches. I think stocks tend to overshoot and undershoot more because of these algorithms.

As I understand it, the machines also do read news and try to react faster than a human can and due to the fact that they are about as smart as cockroaches they screw that up a lot. But they have a lot of built in advantages and I think the experienced firms like Citadel make a lot of cash from the spreads and they also make some money driving markets to ridiculous short term extremes. I have no specific knowledge or inside knowledge of where their revenues come from. I only base this on watching what they do as described above and looking at the prices as they flow across the tape.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

Higgenbotham
Posts: 7436
Joined: Wed Sep 24, 2008 11:28 pm

Re: Automated Trading Systems?

Post by Higgenbotham »

The above post might seem like I am against having firms like Citadel being allowed to buy order flow. That's not the case. I would rather have them buy order flow and take their piece of the action from time to time than pay a fixed commission. Fixed commissions force retail to sometimes buy larger lots of stocks at any one time than they would like to. Today I was buying little $1500 blocks of Snapchat and if I'm paying $7 per side in commissions I can't do that. There's nothing that says I have to give up anything to Citadel or whoever is taking my orders. Also, if I want out of a big block of thinly traded stock because the price has suddenly shot up and am willing to give up a little, they will take it off my hands for a way better price than anybody else will. That's very valuable.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.

NoMansLand
Posts: 44
Joined: Mon Jul 11, 2022 10:46 am

Re: Automated Trading Systems?

Post by NoMansLand »

Thank you very much Higg for the insight. I had not considered the effects of automation on commissions and the cost of trading. I can see how, despite the potential for chaos and manipulation, that would be attractive to everyone involved in the markets. Making it easier for new players to get their money into the game is the best way to run a casino.

AnthonyColucci
Posts: 1
Joined: Mon Feb 06, 2023 9:52 pm

Re: Automated Trading Systems?

Post by AnthonyColucci »

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NoMansLand
Posts: 44
Joined: Mon Jul 11, 2022 10:46 am

Re: Automated Trading Systems?

Post by NoMansLand »

So F the bot post above this one, however, this is exactly what I was asking about when I started this thread. How much influence do these programs have?

https://www.zerohedge.com/markets/lyft- ... gs-release

To quote one Kyle Reese, "It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear! And it absolutely will not stop, ever, until you are dead!"

Would any of the trader for a living types care to comment? I know Cool said he was leaving, but maybe he's lurking?

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