Algorithm trades or automatic trades have shown itself as one of the future trends of capital market for some time. Startup and non-startup that have started working in this field bring up interesting strange claims.
Learning machines and more generally artificial intelligence is absorbing attraction in financial markets. Big companies in the world such as Black Rock in united States of America, CITADEL and General Tradings in England as algorithm investment leaders and companies such as Quantopian and Numerai are trying to reach the leadership of artificial intelligence or more simply algorithm trades in financial markets, bur what are algorithm trades and why should they matter?
What are algorithm trades?
Every kind of automatic trades whether High Frequency Trading or Low Frequency Trading is called algorithm trades in a simple definition. As a simple example, the profit and loss of an algorithm are trades that order automatic buy and sell, but do algorithm trades end there? The answer is definitely no.
Profit and loss limits and such algorithms are placed in trading algorithm of beginning of spectrum and in the side of basic and very simple algorithms so that there is a trading algorithm in other side of the spectrum that was inspected, was evaluated and was analyzed with basic and technical data and without human intervention. Then the process of choosing portfolio, allocating capital to each symbol, buying in a correct point and selling in the correct point and the recognition of profit while observing defined risk were performed automatically. It is scary, but it is real. Nowadays there are algorithms in the world that perform all these chains automatically.
So every automatic trade can be placed in a point of algorithm trades of spectrum. We can introduce the following category if we want to classify this spectrum according to its functions:
Trading algorithms of performing trades: This kind of trading algorithm that will be reviewed in more detail in the future are only designed for performing analytical trading orders that means the trader chose the desired symbol and also entry and exit point ) of course, it is also possible that trader has mistaken all of these analyses and the trade results in his loss (. From this point, the analyzer only wants to change some of his funds to stock and his issue is performing the trade. For example
suppose that a trader wants to buy five billion dollars of Tesla shares with numbers of Iran’s assets. An order with the worth of five billion dollars can’t be recorded in market. This issue causes the effect on market that is usually harmful for the trader because people buy with higher prices by seeing the order so the price will rise before the trader buys the shares. Therefore a trading algorithm has the duty of dividing the order into smaller orders in different volumes and their performing in different time periods so market impact will be decreased.
Signaling algorithm: This kind of algorithm usually provides additional data to the trader or analyzer and causes that analyzer or trader’s decision process improves and therefore his efficiency gets better. This kind of trading algorithm is not profitable itself and role of increasing efficiency must be played with the series of them simultaneously or along with other analyzes. Signaling algorithm include all technical analysis indicators such as RSI, MacD, MA or Ichimoku that according to statistical records do not have profitability more than the average of market in a long period of time.
Market monitoring algorithm: This kind of algorithm that can also be placed in signaling algorithm classification has the duty of market monitoring. For example suppose that when the symbol of a share opens, you want to sell or buy the teammate symbols of this share for a short period of time or you want to be aware of financial statement announcements of some of its special symbols as soon as they were sent or in more professional cases you want to identify those companies that have the minimum loan amount in their accounts in the state of decreasing amount of interest rate ) loan ), you can have optimal monitoring operation on all or a part of market with the help of market monitoring algorithm by searching the desired condition.
Position trading or low frequency algorithms: This kind of trading algorithm considers buying or selling share to be kept for a long period of time. It is worth mentioning that every process that has the time of more than one hour is called long time in the field of algorithm. For example suppose that your strategy is selling to buying line in the condition of offering line and buying in lower prices, one trading algorithm of position trading can order buy/ sell symbol automatically as soon as the volume of buy/ sell reaches your predicted condition and in lower prices that probably reaching it takes more than a few minutes, orders in reverse. There are also other algorithm in this category that buy and sell of each symbol in them takes more than a few weeks in average. The difference among position trading and previous categories is the recognition of entry and exit points with high probability. Actually suppose that you used monitoring algorithm and chose 10 symbols. With the help of a set of signaling algorithms you concluded that x share can offers you 10% efficiency in one or two weeks. You trade this share with the help of trading algorithms. Congratulations! if all of the process is automatic. You have a money printing machine that you can categorize it in position trading classification.
HFT or High Frequency Trading algorithms: According to definition of investopedia website this kind of algorithms must have the time of less than five tenth of second from buy to sell on average so that it can be placed in this category. There are many brokers in international capital market that do not notice to the worth of your trade that
will receive a fixed fee for each trade in reverse. If the worth of your capital tends to infinity, the percentage of fee will tend to zero. For example the worth of your trade maybe really high so that in the case of increase of the fourth number after decimal point by one unit, your trade fee will be paid. These kinds of trades that dominate NASDAQ and NYSE markets are usually very useful in currency pair of Forex. Arbitrage algorithms are placed in this category.
Should we really care about this issue?
Whether we want it or not, algorithm trading tools in the financial markets of all over the world from America to European Union, from china to India and Singapore has created such competitive advantage that could get all of traditional companies out of the market. Logically, we can’t be hopeful that there will be a place for traditional methods because of benefits of computers to humans in the field of speed analyses, the speed of performing orders and decisions, not being tired, not making mistakes and also not effecting emotions on the trade and strategy.
But, will not be there a place for human in financial market? The answer to question is also no. Considering the volume of trades )number(, algorithm trades are more than 85% of the total capital market in America and this issue means the dominance of a 52 trillion dollars by trading algorithms, but the remaining 15% still analyze and trade in other ways.
What did the pioneer global companies do in this field?
Black Rock company is an American global investment management company that is in New York City.
This company was launched in 1988. At first Black Rock was a capital management and fixed fund, but nowadays it has become one of the largest capital management companies in the world and it has about 7.43 trillion dollars under management until 2017.
This company has 70 offices in 30 counties of the world and has customers from more than 100 countries of the world.
Black Rock is called the biggest “shadow bank” because of its high power and breadth, its extensive share of economic assets and activities.
Some of the features of Black Rock that caused this set becomes the top company in the list of the world’s best companies are amazing algorithm trades and the great development of artificial intelligence that help a lot to enter the best investment chances for the customers of this company.
general trade holding:
One of the youngest financial companies that has the highest growth of capital during the last year is general tradings company. Its original place is in London and in the commercial center of London. general tradings company tried in development and improvement of algorithm trading system with the use of very advanced artificial intelligence from the beginning. To reach this goal in addition to designing its special trading algorithm, it got help from very advanced artificial intelligence designed by j4capital company and it could reach unique and completely secrete ways toward profitable trades in financial markets with the cooperation of this company that itself has begun to enter trading market based on artificial intelligence. According to reports and commission conformation of London trades, real trades of this company have been begun since 2019 and could reach 1000% profit in a period of nine month that was the highest profit among all traditional companies or based on algorithm trades. Accordingly, it has started operating and obtaining capital from about 100 countries of the world with the license it received in June 2020.
Most of the analyst of London Market are skeptical of the company and its capabilities, but many other believe that the opportunity created by this company is an excellent and unique investment and some even believe that the company’s ability to make a profit at the peak of the Corona crisis is strong evidence of the company’s future success.
Many of the investment consultants in London mention this issue that starting obtaining capital of this company is a unique opportunity in the present time because they believe that in which the capital of the company is one billion dollar, the capability of gaining profit by this company is much higher than the time in which the capital reaches 100 billion dollars ) The purpose is the gaining the capital of this company for the next three years (.
One of the other very active company in the field of algorithm trades is CITADEL company that was launched in 1990. It has focused on algorithm trades since 2008 and it is taking advantage of them by the development of exclusive trading systems. The main office of this company is located in London like General Trading that according to London commission trading announcement in 2019, managed about 30 billion dollars of capital.
CITADEL is originally a hedge fund company and uses a variety of methods to manage capital risk. The main difference between the company’s algorithms and General Trading is its focus on risk reduction while the focus of General Trading is on the increase of profit and active presence in different markers. They are comparable considering profitability and also have different customers.