Anyone that has read their favorite financial website lately knows that financial marketplaces are undergoing significant transformations. Traders, market makers, fund managers, investors, and anyone involved need to understand this transformation in order to position themselves for the future. Since we hear about algorithmic trading so often in the equity markets, it’s not surprising that other markets are beginning to follow suit. Here’s a great story showing us the transition to algorithmic trading in the bond markets:
The key take away from this article is the quote: “The decision is another sign that electronic trading is deepening its reach into debt markets, where many investors still trade by phone. Just 16 percent of investment-grade corporate debt and 4 percent of high-yield debt is traded electronically, according to Greenwich Associates. In the foreign-exchange market, where more than $5 trillion trades each day, more than three-quarters of trades are electronic. Other banks are carrying out similar changes.”
Why the switch to automation? Cost! Fixed-income trading desks are facing more pressure than ever from regulations, which is making it more expensive to handle big trades. After seeing the cost reduction success of other trading desks that switched to automation, debt traders can no longer justify the costs of the status quo. Algorithmic trading offers the benefits of speedier and more efficient order execution when compared to human traders executing orders by reducing manual errors and emotional trading decisions, as well as mitigating execution costs.
News stories like this just provide additional confirmation that the days of the pit/manual/phone trader are long gone. Anything that has high volume, high demand, and can be standardized will eventually make the shift into the algorithmic world. The only exceptions to this trend are the highly specialized products that only the banks, hedge funds, and serious professionals have the access to and knowledge of. While these unique products may not be traded algorithmically, they certainly are analyzed using them (one example of this is Monte Carlo simulations). So no matter where you look, algorithms can be found in every corner of the financial marketplace. So what does that mean for us individual traders? Since none of us are able to participate in the highly specialized products untouched by automatic execution, we’re stuck in the public pool with everyone else where the trend of automation is only getting stronger.




“I don’t get paid to be an optimist, I don’t get paid to be pessimist, I get paid to be a realist.”      Kyle Bass, hedge fund manager


You have to remember that to find long term success in trading; you have to be a realist. If you are anything but, you’re going to fight a long and grueling battle against the market that you may not survive. Like it or not, money controls the world. Where that money is going is what you need to pay attention to. Despite the concerns, misunderstandings, and controversy regarding it, algorithmic trading is here to stay, and it will only continue its fierce and rapid growth. The market is always right, and it always wins in the end.

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