Algo Trading Can Create Chaos

It has been only a short week since my presentation algo trading, and already, the markets seem to be taking a nosedive! However, before you begin to panic, you should realize that algo trading is exactly what caused this volatility in the market in the first place. In an article featured in CNN Money , Chris Isidore succinctly describes the effect of algorithms taking charge during regular trading hours in the financial markets, and how human projections based on the Federal Reserve’s decisions created a situation in which preprogrammed trades cascaded into one another to create a three-day event in which the Dow, S&P, and NASDAQ took a nosedive.

Although this may seem like a catastrophe, there is actually little to worry about. As the programs run their cycle, and buying opportunities present themselves during the selloffs, those same programs (or others written for buying purposes) immediately execute buy orders. These orders, when executed by countless programs, can then buoy the price of shares to create the rebound we have seen during today’s trading day. Obviously, we, as people, are less rational and more emotional. It may be difficult to think about investing when you see news headlines that declare the “loss of all 2018 gains in days.” But if the facts line up with indications of a profit opportunity, then there is no reason not to seize the opportunity to dive in.

Side note: In bearish environments, it’s best to invest in inverse funds and ETFs that appreciate in value when the underlying asset depreciates. These includes ETFs such as SPXS, FAZ, and DWTI. Such funds can be found in every corner of the market inverse-tracking almost every possible kind of asset.

Lastly, I mentioned in my presentation that there were low-cost methods of investing that allowed greater accessibility for new investors. These platforms include Robinhood and Ustocktrade. These trading platforms offer either free or low-cost trading, minimizing the effect of high trading costs for those with starting capital.

5 comments

  1. I thought this article was strong because it related to the world around us and how technology can be a good thing. The article that was linked into the post helped me understand the topic even more. It worries me though that the market will be controlled entirely by these algorithms eventually, and then it seems that the economy is out of human control all together. I don’t think it will ever fully be out of human control, but it does beg the question, when will humans be out of this “equation” all together?

  2. I have really enjoyed learning more about this topic from you as it is one I am interested in yet had little knowledge about before your presentation and blog. I was listening to CNBC at work the other day and a major point they made about the markets taking a hit was how investors’ risk tolerance is completely different when they are actually faced with a downturn versus when they are asked how they would handle a downturn. I think this was another major factor in the down days for both the markets and Bitcoin. Once some people start seeing a major selloff, that meeting with their financial advisor where they said they are willing to lose 20% goes out the window when panic kicks in. This emotional response has the same result as when algorithms decide to sell, but, as you mentioned, one of the benefits of algorithm trading is that they also execute buy orders while selling off which helps create a rebound like we saw.

  3. Market runs in cycles, and algorithmic trading plays a big role in a sudden drop in the market, setting the rest of market issues to be stable. I am not so concerned about algorithms/machines taking over the entire trading activities as traders still set up a game plan and set the initial decisions amid big Fed announcements or earnings season. However, I do see it as a diminishing industry that fewer opportunities are provided for humans as time progresses. Only a few that have a know-how in beating the market will survive, and the rest will simply help with admin tasks for the Chief Traders to make the decision. I wonder if too much tech development is necessarily a plus for the financial market…

  4. Interesting post. I think Mike has raised an interesting point in that if the algorithm-based trading methods have such an influence over the market, is it possible that machines could take over the entire market in essence? Furthermore, if algorithm-based trading has such a potent effect on the market, what does that mean for industries full of money managers and wealth advisors? Could technology eventually hollow out this section of the finance industry?

  5. What happened in stock market last Friday and this past Monday was absolutely shocking! Nice to have your presentation last week to get a heads up. I was wondering since Algorithm trading is all robotic and motionless, is there any legal regulation of that? Serious Collapse would cause a series of catastrophes any way.

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