Technology is evolving. IT infrastructure is developing everywhere and one of the finest additions to the ranks is Artificial Intelligence, or AI in short. This is a machine that is simulating human thought processes with the added enhancements and capabilities of computer processors to go through huge chunks of data in the smallest amounts of time without forgetting all of the smaller details that are important when making a decision. With the development of AI machines now are learning how to study and solve problems much like humans do.
AI in Trading
AI is being used in many different industries. Data analysis capabilities of the computer central processing units are impeccable. These are calculators that view huge datasets and go through them in a matter of seconds. Most of the companies like hedge funds, exchanges, and others are utilizing such technology to get investment ideas and build portfolios.
Trading is not falling behind on this notion as well. To understand the meaning we need to delve deep into what is auto trading in a more serious tone. The first time we saw these automated trading systems was in 2008 and since then it saw a nonstop development cycle. Now there is a wide variety of robots available to help out investors in their trading endeavors. Not only did the AIs become smarter but now we have much better-developed platforms and brokers giving us the ability to come up with better strategies and methods. Trade automation strengthens the mutual influence of world markets and gives huge advantages over the traditional methods of stock transactions. This is called algorithmic trade which neutralizes many human factors in the whole system.
Although it is not all sunshine and rainbows when it comes to the AIs. There are huge disputes going on demanding some kind of limitations to be put upon algorithmic trading due to some consequences that usage of such technology has on the overall health of the market itself. The biggest argument to support such demands is the response of AIs to market slumps. We will discuss this in detail in this article.
How AI Reacts to Markets
A lot of times people who want to limit the impact of auto trading on the market mention the reaction of software on market slumps or market crashes if we want to use more traditional terminology. The initial problem is not with the overreaction but lack of one. This most of the time has to do with the design of these platforms so it is rooted deep into the development cycle. It is widely known that the AIs are more accustomed to smaller changes in the market. That is what they are designed for and what they learn.
Auto trading is popular in stock and foreign exchange markets (Forex, FX) and is referred to as High-Frequency Trading (HFT). It is widely accepted that HFT is only good for people who do it. Although, these are usually huge companies like banks, hedge funds, etc. as it requires huge resources as well as a very strong computer. Researchers studying the adverse effects of HFT on market health have come out stating that it leads to high market volatility and suddenly diminishes the liquidity. This ends up raising concerns about the stability and health of the market as a whole. Technically speaking, HFT is not illegal as it is not expressly forbidden. However, it is detrimental to institutional investors as well as retail ones. Unfortunately, it is not going anywhere as it has become a huge part of the market as a whole. Even more, the HF traders are usually regarded as market makers and these are usually the biggest fish in the fish tank.
Is Algorithmic Trading Viable?
As we have already mentioned algorithmic trading is not going anywhere. This is a natural continuation of information technologies. The 21st century is often regarded as an era of computers and it is not far from the truth at all. Even more, auto trading is becoming more and more popular each day. Although, the natural bottleneck is the lack of resources for us average people who are trying to trade.
It is worth noting that when algorithmic trading is used the investor is not actually participating in the trading process. The function is of a bystander rather than that of a proactive actor. The person behind these robots is watching how adequately the HF system is handling the market situation.
The process is mostly autonomous and fully automated. This has huge benefits in itself. Firstly, AI, in comparison to human counterparts, is fully objective. This means that there are no emotions or subjective feelings involved in the thought process. Humans can be influenced by a number of different emotions like fear of losing money, or excessive happiness due to a beneficial increase in the stock price which in the end leads to distraction and then a mistake.
A trading robot cannot physically get tired, sick, happy, sad, nor can it be affected by changing weather or family situations and will continue doing its work 24 hours 7 days a week without needing to take a lunch break, sleep, or anything of that kind. The computer side of it also allows making light speed objective decisions based on all of the present data that is taken into consideration while making a decision. A human may forget something, not notice it or just keep it in the back of his or her head and be inattentive.
The AI can also carry out different market strategies at the very same time. It is not limited to two hands, two eyes, and two ears. It is especially important when the company is trying to manage a portfolio that has a number of financial instruments in it.
We believe it is quite clear that the trading capabilities of AIs are much more advanced than that of a human investor. Due to this, robots are able to show much better results and gain a much higher profit due to their objective and ruthless decision-making process. It should be noted that during the coronavirus pandemic which caused the world to lockdown have brought dark days on the AI traders.
This is caused by the fact that COVID-19 has affected almost every business sector in the world. Different types of assets have also suffered a lot and the prices of stocks fell significantly. The fact that such a huge fall massively happened the algorithmic traders decided that it was high time to panic buy all of these stocks which drained the budget of a lot of investors buying up company stocks that may not recover at all. This goes to show that AI trading needs quite a bit of work to become actually viable during unforeseen events.