Are we in for trouble by allowing computers to handle trades?

Discussion in 'Stock Market' started by ThisIsMe, Sep 5, 2019.

  1. ThisIsMe
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    ThisIsMe Gold Member

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    Just wondering. I read that between 50% and 60% of all trades are done automatically by computer systems now. I'm curious if this is a mistake as one glitch, or if someone decided to try and hack or sabotage the system could spell massive losses for everyone.

    Seems like human intuition would be preferable to allowing an algorithm to make these decisions.
     
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  2. Natural Citizen
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    Natural Citizen Platinum Member

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    Got dead bankers?
     
  3. MarathonMike
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    MarathonMike Platinum Member

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    That is one of the reasons I don't let anyone manage my stocks but me.
     
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  4. fncceo
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    fncceo Gold Member

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  5. The Banker
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    The Banker VIP Member

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    The algos are designed to take human emotion out of trading, psychology is literally like 50% of trading, especially day trading. The algos just scan the markets for patterns or scan the news feeds for new stories and make quick trades accordingly.

    There was a "flash crash" in 2010 where the Dow dropped then reclaimed 1000 pts in like 10-20 minutes that some say was the result of algos. I wouldn't worry about it though. These algos make good money, they do a lot of crazy things like scan news feeds/Trump's twitter account and jump on trades quickly based on news announcements- Just look at this thursday the S&P popped 20pts in literally 5 seconds when they announced that they were going to reach an interim trade deal, then it dropped those 20 pts in about 5 seconds when the WH said that wasn't happening.

    As far as a full blown crash brought on by malfunctioning algos? highly unlikely as there are many different systems all working differently so some are selling some are buying etc based on their system parameters.
     
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  6. Pavel Svinchnik
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    Pavel Svinchnik Active Member

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    Good point; for every transaction there has to be an agreement between a buyer and a seller on the value of the stock. However, what if two algos are trying to do a deal? Could it result in a price spiral up or down? Or would it just reach an equilibrium and stay there. At least, until a third algo sees what the first two are doing.
     
  7. Natural Citizen
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    Natural Citizen Platinum Member

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  8. ThisIsMe
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    ThisIsMe Gold Member

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    I guess my point was, computers dont know nuance, they dont know conjecture, they cant differentiate sarcasm from legitimate statements, and they dont know what a bluff is.

    Say someone makes a statement, such as " well, if your country doesnt want to play ball, then we are just going to take action". A computer may not know that is a bluff, or that there is sarcasm in it.

    Or, a president may make a statement that we are going to take a certain action against another country, but then later, change his mind. The algorithms cant detect that and may make a wild swing one way, and then later make another wild swing to correct, whereas human intuition would be able to have insight into "well, I k how he said that, but I don't think hes really going to follow through".

    My main question was, is it right, is it safe to put the financial well being of millions of investors on auto pilot, or, in the hands of a computer that only sees black and white, and not the grey area that happens quite often?
     
  9. Toddsterpatriot
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    Toddsterpatriot Diamond Member

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    My main question was, is it right, is it safe to put the financial well being of millions of investors on auto pilot,

    Are you invested in a fund that uses algos to trade your money? If not, don't worry about it.
     
  10. The Banker
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    The Banker VIP Member

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    Yea algos can be wrong and can mistrade the news/market all the time. - but it shouldn't hurt them too much, it's just a small losing trade, offset by many winners- overall net positive.

    I day trade so i watch the market pretty much all day long, and I am in a trade group where we talk about the market and trades etc. Everyday we watch for the Trump tweets and we see how the market has a big or small response to them. Traders and algos try to "push" the market one way or the other sometimes it works sometimes it doesn't. If it doesn't work they take a stop and have a small loss, nothing major.

    The algos aren't going to "bet the farm" on each trade they make. If they are right they win, if they are wrong they lose, but they don't put the entire fund into a single trade- the same way a smart human trader doesn't do that. They use proper money management/stops etc.

    An algo isn't a "free lunch" meaning that not every algo has great returns, some suck, just like human traders. But to worry that they are going to crash the market, I doubt it. Algos can be wrong sometimes and still generate great returns, just like a human trader can be wrong and generate great returns. If the market appears to be overbought/sold some will go the other way etc, just like humans. In the end most algos are doing great, but plenty fail.

    I understand your point, but I would say that overall they make lots of money as they are very popular and they have all these crazy tricks to make money. I hear these crazy reports that some Algos hit on like 90+% of their trades or almost never have losing days. Trading the news is just one of their methods they have lots of em.
     
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    Last edited: Sep 15, 2019 at 8:37 AM

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