How Automation Is Continuously Changing The Trading Space In 2020!

A Glimpse Into History

There was a time when the entire trading space was run by humans; every single share sold or bought was done manually. In the 1970s, computerized trading systems were introduced in the American financial markets. The New York Stock Exchange (NYSE) introduced an electronic system called the Designated Order Turnaround (DOT) to route orders for securities without a broker. 

From then, automation and computers have dominated the trading space so much that today, 75% of shares traded on US stock exchanges come from automatic trading systems. One survey conducted by Refinitiv and Greenwich Associates showed that 78% of the respondents agree that technology has made financial markets better and more efficient. This article gives an overview of how automation is playing a key role in the trading space in 2020. 

What is an Automated Trading System?

Automation, in a generic context, means the ability of a machine to carry out a task by following a pre-programmed set of instructions, without human intervention. An automatic trading system or an algorithmic trading system allows traders to specify conditions regarding trade parameters to automatically decide when and what volume of trades should be executed.  

Trading Rules

For example, one such trading rule could be to sell 1000 shares when the 50-day moving average of that security crosses a certain threshold. The computer follows the particular market you want to trade in and execute the trades as per the conditions given. However, just because a computer is involved does not mean your strategy will always give you profits. 

Advantages of Automation 

Why has the entire trading space shifted towards automation? One of the primary reasons is that the lack of human intervention had led to a cut in transaction costs and has also given traders better control of their stocks. 

Here are some of the other advantages automation offers that are extremely useful in today's stock markets. 

1. Increased Speed and Efficiency 

Market conditions change so fast that the difference of a few seconds to execute a deal could make an enormous difference. With automatic trading, a computer is capable of instantaneously executing deals as soon as it spots a favorable scenario in the market. One subset of Algo trading is called high-frequency trading or HFT, where trade deals are done in the span of milliseconds or even microseconds! 

2. A More Disciplined Approach to Trading

Human emotion is one of the biggest obstacles that come in the way of trading. The greed to make more profit than you planned for, sudden whims that make you want to execute a bad trade are all examples where traders have lost a lot of money because of their emotions. With a computer executing trades for you based on pre-set conditions, these incidents are avoided; things go exactly as per the code. 

Automation also prevents erroneous trades. For example, if you wanted to buy 100 securities in a deal, you will not incorrectly get 1000 or 200 securities. Other human errors in terms of mathematical calculations are no longer a worry either. 

Moreover, automatic trading improves consistency: if a strategy works once, it will definitely work if a similar situation repeats in the future; all the variables are decided by us, and there is no human factor involved. 

3. Accuracy Improved Using Backtesting 

Backtesting is the method for how well a strategy or model performs - in this case, a trading strategy - by testing it with historical data. If the model is able to correctly predict the values ex-post, then you can be reasonably confident that it will work with a new data set too. 

By experimenting around with code and doing sufficient backtesting, the accuracy of the system can be improved, and traders can also get a better idea of the system's expectancy (profit or loss for a given amount of risk). 

4. Diversifying Trades 

As a human trader, you can only keep track of so many data points and charts and numbers at a time, severely limiting the number of markets and securities you can trade in. Automated trading allows traders to access multiple accounts, strategies, and markets simultaneously, giving the trader many more opportunities.  

Future Technology to Overcome Limitations

Automated trading is continuously evolving, with faster and more efficient algorithms and software being developed every day by various programmers. However, in its current state, there are a few shortcomings that need to be fixed for use in the future. 

1. Monitoring and Repair

When things are functioning fine, the computer can achieve so much more than a human trader can. However, computers, like any other electronic device, can malfunction now and then and human intervention is needed here to fix the issue. Power failures, connectivity problems, and mechanical failures can cause computers to stop working, potentially leading to several missed trade opportunities.

Of course, no machine can function forever without flaws, but the goal is to minimize the number of times you need to repair the machine. Another area of interest would be how you can make another machine automatically over if one computer fails.  

2. Avoid Scams

It has become relatively easy for cybercriminals to sell fake software and applications in any domain. When using or looking for a new automated system, do your research to check if it is legitimate by reading reviews and ratings. Most legitimate systems come with a trial period for you to see if it satisfies your purpose before purchasing the full package.  

How Tech-Savvy are You?

Automation is here to stay, and any aspiring trader must be skilled at it. From a part-time day trader to the most reputed institutional traders, everyone uses varying levels of technology to simplify and carry out their trades on stock exchanges. 

However, before you get carried away by the hype and use automatic trading systems, convince yourself that the investment is worth it. Start with simple strategies until you get the hang of how the system works and then move on to more complicated trade deals. A computer can make your job much more efficient only if you are thorough with the working of the system.