DIY Algorithms: Do They Really Level the Playing Field?

Everyday traders now have the ability to use "algo bots"

Aug 11, 2015 at 9:44 AM
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    Tired of worrying about how those algo bots are ruling the markets and ruining the trading business? Well, apparently there's a new way to battle them. If you can't beat them, join them. This, from The Wall Street Journal:

    "DIY's newest frontier is algorithmic trading. Spurred on by their own curiosity and coached by hobbyist groups and online courses, thousands of day-trading tinkerers are writing up their own trading software and turning it loose on the markets."

    "... Interactive Brokers Group Inc. actively solicits at-home algorithmic traders with services to support their transactions. YouTube videos from traders and companies explaining the basics have tens of thousands of views. More than 170,000 people enrolled in a popular online course, 'Computational Investing,' taught by Georgia Institute of Technology professor Tucker Balch. Only about 5% completed it, but at an algorithmic trading event in New York in April, three people asked him for his autograph."

    Don't have the time or the capacity to learn coding? There's now even trading platforms that let you simply come up with the strategy, and they'll unleash the bot for you. On one hand, I think it's awesome. It's always nice to see the little guy level the playing field with the big shots.

    On the other hand, it's a bit of a false leveling. It's been a while since merely having the ability to trade so rapidly has produced automatic profits. In fact, it's debatable that was ever the case. Rather, it's about the speed of your access -- remember the whole co-location issue? -- and about the quality of the algorithm itself.

    I don't doubt that some of the DIY folk will create excellent algorithms. But most won't, or at least won't create algos that will "beat" the professionals with their bigger money and faster access. But, at the end of the day, it's going to play out like trading in general plays out.

    A small percentage of people win at it, and some, of course, do very well. Most do not, however, and they will lose some or all of their money and then walk away. It's always tough to gauge what percent of traders earn money, in that there's a total case of Survivor Bias going on. If there's such a thing as Trading nowadays, it would probably contain a good share of successful traders, but it doesn't accurately measure the odds of success. That's because no one's including the guys and gals that have walked out the door over the course of time.

    The DIY algo game will follow the same course. Be prepared to read stories about a small minority that create successful algos and mint coin literally in their sleep. And hey, if you can figure it out, kudos. If you have a trading strategy that works well, it should only work better in algo form, I'd think. I'm certainly tempted to learn more about this. Just don't expect stories about the many that give this a shot one way or another and don't make it to the other side.

    Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research


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