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Actually, it's pretty tough for an algo fund to make money when Aunt Harriet sells the 100 shares of GE she bought in 1962. The big, dumb mutual funds that turn
by byrneseyeview 17y ago
Actually, it's pretty tough for an algo fund to make money when Aunt Harriet sells the 100 shares of GE she bought in 1962. The big, dumb mutual funds that turn over their portfolios in a year do get hit by this kind of stuff.
On the other hand, algo funds can't make money without 1) making market prices reflect the intentions of traders, rather than just their most recent actions, and 2) making the market more liquid. Both of these add a lot of good to the economy in general, even if they do it at the expense of one class of investors.
- ggruschow 17y agoIt's especially hard because Aunt Harriet's order almost certainly won't actually make it into the open market. Her broker will very likely "internalize" it (trade against it themselves), or sell it to someone else who will (e.g. Citadel will happily buy their flow.. they bought Ameritrade's last I checked). That very well may be the future of these funds - compete for the customer or pay for order flow like in US Equity Options rather than compete in the open markets. All the orders that can be traded against with any of the typical profitable strategies (most strategies at these places are fairly well known and similar).. won't even make it to the real market. Doing it this way avoids the risks in the open market, notably adverse selection and the need to over-represent your interest in multiple places to increase your execution quality.
- anigbrowl 17y agoGood point. I didn't think of that.