The Future of Automated Trading
As the Automated Trading revolution gathers steam, it will be fascinating to watch how it unfolds. Right now, very few people know or use Automated Trading systems. Yet this is not the stone ages. This is the world of the Internet, and even Internet 2.0.
In today’s ultra-connected world, information travels faster than ever. Even regular web sites and email is incredibly slow compared to blogs and Twitter. As the rate of information exchange accelerates, so does the rate of change throughout the world. Researchers and developers are able to communicate and leverage off each other’s work faster. And acceptance of new products and services by consumers is accelerating as well.
What does this mean for the Automated Trading revolution?
It means that the shift to using Automated Trading can happen faster than ever before. People can learn about how it works and why these systems can help them achieve financial freedom. Unbiased, third party web sites can verify performance and help prevent fraud (including those perpetrated by people like Bernie Madoff). And, perhaps most compelling, as computers get faster and technology improves, the returns from these systems will improve. That means higher returns and lower risk.
One criticism of Automated Trading is that if too many people use it, it will cease to work. I don’t think this is true. In fact, I believe that just the opposite is true. As more Automated Trading systems are used and more assets are traded, it will become easier to detect trends and make money. Right now, a large portion of trading decisions are made by humans. As Automated Trading systems grow, more decisions will be made by computers. These systems are much simpler and have much less variation in their decisions. Therefore it will become easier to identify trends and patterns in the market.
Another result is increased volatility. Most Automated Trading systems detect and ride trends. As more computers ride the same trends faster, it will cause the movement to become bigger. Bigger trends will attract more Automated Trading systems and people, and that creates a virtuous circle. Automated Trading systems will work better as these trends become bigger and easier to identify.
So, perhaps Automated Trading will revolutionize how people trade the markets. It won’t be the first time. The internet changed the way that people buy and sell stock. It made it possible for anyone with a few thousand dollars to trade in the Forex market.
And, it’s not the first time that buying and selling has changed. 2,000 years ago, if you wanted to buy something it meant going to the bazaar. 20 years ago, shopping meant going to the supermarket or mall. Now, it can mean price comparison and home delivery. Is it possible that the Automated Trading revolution will have as big an impact on investing as the Internet has had on shopping?
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
When someone makes money trading, doesn’t the person on the other side of the trade lose money? In which case, once automated systems are consistently better than any human traders, those who have successful automated trading systems will start fleecing those without them. Eventually everyone will have to move to automated systems, but someone still has to lose in order for another to win, so it will end up being those who are capable of developing or affording the best systems that will be making the money, while the majority will continue to lose money.
Don’t get me wrong, I think this is the way it will go and I don’t have a problem with it, but I don’t think being profitable will be easier, just more efficient for those few who are on top of the game.
@Seth
Hi Seth,
Thanks for your thoughtful comments.
I don’t know if I agree that when someone makes money trading another person loses. I think it’s possible for everyone to make money.
However, I do agree that people who have successful Automated Trading systems will make money and the people who do not have successful systems (either automated or human) will lose. But that is the same situation that we have today. People who know how to make money will make it, and those who do not will not (until they learn how to do it).
The point that making money will be more efficient for those few who are top of the game is good. Technology has not changed the rules of money. Technology has only accelerated it’s movement. People who are good at making money will be able to do it faster and more effectively through new technology.
Hi Seth–
Great points.
It’s difficult to predict where this technology will take us, but the fact that it’s taking us… somewhere… is beyond question.
I’d like to add this scenario for consideration.
If exponential gains are possible with investment technology, it would be safe to assume that this technology will cause exponential gains with other aspects of the economy: production, communication, medicine, etc.? This would change the zero-sum economic rules.
Indeed, as you point out, if automated trading does reach this level of saturation, there will be a financial Singularity.
I guess I should qualify what I mean about there being losers to offset the winners. I’m talking about those who are buying and selling to make money off the fluctuations in the market. I can’t currently envision how everyone can make money in that situation. So the key is to be among those with the best systems early on, which I guess is precisely what you guys are focused on.
On the other hand, when it’s only about investing rather than trading, I could see how everyone could benefit.
You’re right Matt, we don’t know where it will go and “financial Singularity” is probably an appropriate term since we probably can’t even imagine it. Whatever it is, it will be interesting! (Especially if you’re on the forefront.)
Hey Seth–
I do see your point.
I guess we’d like to be the bridge that can help create wealth for as many people as possible as we near that financial Singularity.