Success stories of real funds in using algorithms to replace traders
The stock market is growing more complicated for us to trade because of how quickly technology is changing. The introduction of algorithmic trading, which has enabled traders to develop their abilities and compete against other people, is one of the most significant shifts that have taken place. This type of trading has also increased the standard for other types of traders, which is on track to surpass conventional techniques.
In the future, high-frequency trading will take the role of human decision-making in the stock markets, according to a working paper published by the UK Government’s Foresight panel, which Dame Clara Furse chairs. But let’s first go back to the times when it all started and see how traders picked up the idea to use software, how institutional traders even replaced their top people with automated systems and try to understand if algorithms finally replace traders in future.
In a nutshell
The 1970s marked the beginning of the idea of computerized trading on financial markets. The New York Stock Exchange first offered consumers the ability to order shares through a predetermined order turnaround in 1976. The NASDAQ established itself as the first global electronic stock exchange in 1971.
The exchange used a variety of market makers in its electronic quotation system rather than an auction method. The exchange saw over 42% of the total volume of shares traded on the US market in 1992.
Algorithmic trading’s primary benefit is its speed. It also offers a variety of features, including automation, which does away with manual interaction, and numerous data mining and exploration tools.
The capacity for risk management in algorithmic trading is another benefit. Trading of this kind enables traders and investors to put their strategies to the test and see how they perform. They also include a variety of tools, such as simulation (back-testing), which allows one to run a test without really engaging in trading. However, one should only use these strategies in actual markets if they are 100 percent certain they will work.
Replacing humans with algorithms
The development of computer-based algorithms has displaced investors and single-stock analysts as the primary movers of the value of the stock market.
Approximately 230,000 jobs are anticipated to be lost as a result of financial organizations’ projected 10% reduction in their human staff by 2025, according to a report by Opimas. It is anticipated that the money management sector will lose about 40% of its jobs.
A top investment business in the world, BlackRock, disclosed a top-secret ” Monarch ” project in 2018. It required reorganizing its equity division and removing ineffective managers before funneling money into quantitative products. A discussion regarding the company’s plan to replace people with robots was triggered by the decision.
The asset management sector is seeing an increase in the use of algorithms and machine learning as funds attempt to improve the performance of their various departments while also increasing the efficiency of their operations. They still struggle, though, to put these advances into practice in a way that their rivals find difficult to duplicate.
According to reports, Steven Cohen’s Point72 Asset Management company is utilizing computer algorithms to attempt and identify the precise trading methods that helped him become a multibillion-dollar dealer. Bloomberg claims that the company is attempting to duplicate Cohen’s performance by using data gathered from his most successful bets.
Analyzing the information gathered by Point72’s traders, such as the size of their holdings and the degree of leverage, is one of the key elements in the procedure. The company then develops a plan to repeat the achievement using the data. Additionally, it is looking for market patterns that it may employ to boost performance.
Additionally, it is said that the company is testing an automated system that will enable its execution traders to do their tasks more effectively.
According to the Economic Times, David Gallers, the director of credit-default swap index trading at UBS AG, was fired in 2012 without a replacement in sight. Instead, the bank employed mathematically based computer models to take his place.
Trading financial products, which once resulted in some of the highest commissions in the industry, is now done using computer programmes by Credit Suisse, Goldman Sachs, and Barclays.
It was revealed in February 2017 that 600 workers at Goldman Sachs’ New York office had lost their jobs. They were then replaced by 200 computer engineers who were in charge of managing the company’s automated trading systems.
Marty Chavez, the Deputy Chief Financial Officer of Goldman Sachs, stated that the company has already begun to automate some of its currency tradings during a discussion panel at a Harvard symposium on the impact of computers on economic activities. He pointed out that a single computer engineer could take the position of four of the company’s dealers. Computer engineers make up about 9,000 of the company’s staff.