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There is a problem with this article: it's equating an algorithmic trade with an informed trade, and assuming that if most trades are algorithmic, most market m

There is a problem with this article: it's equating an algorithmic trade with an informed trade, and assuming that if most trades are algorithmic, most market moves are due to algorithms and not individual traders. But those algorithms are basically looking for what future trades will be, based on current trades. For example, if someone invests $1 million, in $100,000 increments, they'll try to predict that $1 million investment. But the $100,000 increments are not the information the market ought to react to -- the final investment is (the trader, in this case, is not $100K more optimistic about the company during each increment; she's $1000K more optimistic, but is acting on this optimism in a more measured way). Algo trading funds are betting on secondhand opinions. They aren't creating their own. The directional effects of this algo trading should be very hard to detect -- after all, if you can make a sensible prediction about what the market is going to do, you should probably be working for a hedge fund rather than writing (or commenting on) the Journal.

anigbrowl 17y ago
Indeed; given that a basic function of the stock market is price discovery, surely automated trading causes a steepening and undesirable drop in the signal-noise ratio, amplifying signals past the point of distortion? From my signal-processing experience, it reminds me unpleasantly of the Douglas Adams skit about the guy who gets rich by finding a way to convert stock prices to music so people can understand them without thinking. With audio, complex realtime input can result in all kinds of nonlinear distortions. This can be fun if you like crunchy sounds, but it can also spiral out of control. A lot of stock chartists (who believe in price movements rather than fundamentals as a guide to strategy) remind me of astrologers or numerologists: there's some math involved, but also a lot of mystical belief in golden ratios, fibonacci numbers etc, without any real scientific methodology behind it. I have a hunch that a strategy of making small trades with a clearly embedded but arbitrary signal will expose a weakness in these systems for incorrectly targeting local maxima - eg if you start making meaningless trades in penny stocks where the volume Vn = Vn-1 +/- Phi, or whatever - sooner or later your arbitrary but very very consistent signal will be read as a 'strategy' and amplified by a robot.
- byrneseyeview 17y ago
  I have a hunch that a strategy of making small trades with a clearly embedded but arbitrary signal will expose a weakness in these systems for incorrectly targeting local maxima - eg if you start making meaningless trades in penny stocks where the volume Vn = Vn-1 +/- Phi, or whatever - sooner or later your arbitrary but very very consistent signal will be read as a 'strategy' and amplified by a robot. You'd need to do a bit better: you would have to set up a situation where your strategy triggers algorithm A, which triggers B, which at some point leads to A being triggered again. You might do something like have one options strategy, and one equity strategy, and then do equity and options trades in the same company.
  - anigbrowl 17y ago
    Subject to the observation above that many brokers would probably just reconcile your trades with those of other customers before sending the final totals to the exchange, thus destroying your strategy, you're quite right by but you might well be able to experiment with relatively small sums on relatively worthless stocks.

anigbrowl 17y ago

Indeed; given that a basic function of the stock market is price discovery, surely automated trading causes a steepening and undesirable drop in the signal-noise ratio, amplifying signals past the point of distortion? From my signal-processing experience, it reminds me unpleasantly of the Douglas Adams skit about the guy who gets rich by finding a way to convert stock prices to music so people can understand them without thinking. With audio, complex realtime input can result in all kinds of nonlinear distortions. This can be fun if you like crunchy sounds, but it can also spiral out of control. A lot of stock chartists (who believe in price movements rather than fundamentals as a guide to strategy) remind me of astrologers or numerologists: there's some math involved, but also a lot of mystical belief in golden ratios, fibonacci numbers etc, without any real scientific methodology behind it. I have a hunch that a strategy of making small trades with a clearly embedded but arbitrary signal will expose a weakness in these systems for incorrectly targeting local maxima - eg if you start making meaningless trades in penny stocks where the volume Vn = Vn-1 +/- Phi, or whatever - sooner or later your arbitrary but very very consistent signal will be read as a 'strategy' and amplified by a robot.

byrneseyeview 17y ago
I have a hunch that a strategy of making small trades with a clearly embedded but arbitrary signal will expose a weakness in these systems for incorrectly targeting local maxima - eg if you start making meaningless trades in penny stocks where the volume Vn = Vn-1 +/- Phi, or whatever - sooner or later your arbitrary but very very consistent signal will be read as a 'strategy' and amplified by a robot. You'd need to do a bit better: you would have to set up a situation where your strategy triggers algorithm A, which triggers B, which at some point leads to A being triggered again. You might do something like have one options strategy, and one equity strategy, and then do equity and options trades in the same company.
- anigbrowl 17y ago
  Subject to the observation above that many brokers would probably just reconcile your trades with those of other customers before sending the final totals to the exchange, thus destroying your strategy, you're quite right by but you might well be able to experiment with relatively small sums on relatively worthless stocks.