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Will algo trading decrease market irrationality? (Read 2704 times)
Hauer
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Will algo trading decrease market irrationality?
02/02/10 at 20:29:12
 
If you can agree that an algorithmic trading program will never have emotion, and agree it can never exhibit or imitate emotion, also you have to agree that irrationality == emotion, or maybe we can remove the word emotion and just go with irrationality, then I'm wondering would it be true that the more algo trading there is the less irrational the markets will be? i.e., even if algo trading algorithms become more and more complex, their sum effect would be to increase market predictability?
Apologies if im just trying to be clever, also I am (very) new to algo trading, in fact not really sure what they do yet.
You would have to 'believe' in irrationality, one persons irrationality is anothers understanding?
Not sure where Im going with this but this is what I'm thinking Undecided
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willc
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Re: Will algo trading decrease market irrationality?
Reply #1 - 02/14/10 at 02:42:35
 
I think this question is actually fairly interesting. As most of us probably know, behavioral finance drives profits and at the same time misfortunes for many. Algorithmic trading is pretty systematic and will obey the rules regardless of what the person who programmed it thinks (therefore, it may avoid the mistakes a person will make with irrational behavior).

Around 60% of today's trading is actually done automatically using similar systems (computerized) sometimes done with softwares from brokerages.

My personal opinion is that it will become more and more competitive as people will be building algorithms to trade vs other firms and people. If everyone's systems are similar then it would be difficult to for many to live off (generate a profit) off the markets.

I am also interested in what many of you think! Please reply!
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