The Future of Trading
10 Top CIOs on Wall Street | Why Mutation Will Matter | Buyside Traders: Not Taking Orders Any More | Calculating Cost First, Trading Second | Trading Desk, in One Box | Changing the Minds of Star Programmers | 2015: The Always On Desk
2015: The Always On Desk
November 4, 2010
What’s more imminent are predictive algorithms, according to DePetris, the COO of Portware. Thease are formulas that take past history and project what while happen, at some point in the future.
They can also act as the kind of “recommendation engine,’’ that Amazon has popularized with its sales of books and other merchandise. Its algorithms set up possible choices that can be made in a given situation that it thinks is appropriate, but leaves the final choice up to the human on the other side of the screen.
A firm that started in Edmonton, Canada, has thrown its neural networking technology at the increasingly vast streams of information that flood into Wall Street trading desks.
The firm is looking for patterns in the streams as well as specific “sensory” imputs that model recurrent behavior in capital markets. In effect, how the herd instinct works.
It’s compiled a pile of ten years worth of tick-by-tick data from all U.S. equities exchanges, including the New York Stock Exchange, NYSE Arca, NYSE Amex, the Nasdaq Stock Market, BATS Exchange and the Direct Edge venues.
Then, it mixes in streams of economic indicators and news that shows sentiment about stocks in general or a stock specifically.
When it finds five or six instances of similar conditions that lead to similar results, it figures it can act on the pattern the next time the conditions occur.
This can apply to “irrational exuberance” in oil prices, as occurred in the summer of 2009, or the failure to foresee drops in housing prices or activity, as occurred in late 2007 and again in the second quarter of this year, when the Obama Administration’s homebuyer tax credit was endin
Broadly speaking, its “algorithm” works like this:
If we have [trend] then [behavioral event] then [overreaction], then you can [buy/sell] into it, during “euphoric,” “depression” or “greed” phase.
But such models are not certain to last forever, said Eric Davidson, vice president of research and trading for titan.
“One of the core questions in modeling is once you have a model that shows an edge, is it going to self-destruct?’’ he said. “Over time, the strategy can become ineffective.’’
DRAG, NO DROP
Traders will begin to configure their own algorithms, rather than rely on programmers or quants.
“Configurability” already is being built into formula-generating tools so that traders can establish how fast and how much of a stock that they want to trade in, over a given period of time, according to Ron Santella, the chief executive of Fox River Execution, a trading technology firm acquired this year by SunGard Data Systems. The most prominent example: Waddell & Reed, May 6, 2010.
Over time, portfolio managers will have their choices set up for them, in advance, with or without requiring human traders to carry them out.