Image: computer monitor

showing trading software

What is trading software?

It is a written trading rules and instructions that a computer in preference to

a person executes to fill high volume buy and sell orders at an extraordinary

speed in the financial markets.
These programs are proprietary trading tools that large institutions such as

hedge funds, brokerage or high frequency trading firms and mutual

(or pension) funds exploit to trade
stocks, currencies and commodities.  

Two fundamental objectives

Every trading program or algorithm has two essential functions:

1/ speed
2/ and competition.

The race to execute, manage and detect greatest trading opportunities

(contrary to the human beings’ sluggishness) has pushed big financial

firms to rely on a new range of extremely sophisticated automated trading 

equipment.  The ultimate purpose is to trash the opponents or any other

competitors and to maximize gains.
This method of trading is also called speed trading, but it is commonly

known as High Frequency Trading (HFT).

High frequency trading firms rely on:

- the speed to access high impact economic news before the general public,
- speed to take advantage of bullish or bearish trades,
- speed to secure gains,
- speed to profit from price discrepancies in real times,
- and speed to analyze social and markets mood from social websites
  such us Google Plus, Twitter and Facebook.

It follows that, to be the first, one must contend with others and surpass

them.  
The race to supersede is excruciating and men or women are more inefficient

than a trading algorithm.

The bottom line in trading

The end product in trading is profit.  Whether one can trade like God or

employ Elliott wave theory like an eagle, the acid test is all about how much

profit one has made.  Therefore, it is crucial to employ the most excellent

technologies to identify the best times one should buy, sell or hold.  

Furthermore, it is also vital to buy or sell at the most acceptable price.  It is not

sufficient to recognize a trading prospect, but to know what the fair price one

should pay is.  Faced with these challenges, human beings could not compete

with high speed trading computers that are executing complex algorithm in

a split of a second.

Two types of trading algorithm

1/ algorithm for technical trading,
2/ and algorithm for decisive financial data or news.

Technical trading programs are more sophisticated electronic scalping tools

that execute millions of real time trades on the ten seconds, one, and two

up to ten minutes time frames.  Several of these trades last only few seconds. 

Their ambition is to “cream the market consistently” (in the proper sense),

and to secure millions of tiny profits at an extraordinary speed.  Technical

trading indicators such as the slow stochastic, MACD, moving averages and

the RSI indicator play a leading role in these trading programs.  

Though, technical trading software generate substantial gain for the

quantitative trading firms, they also create a cumulative market distortion

which can lead to a sharp market correction.

To Know more about technical algorithm trading strategies visit here.

The second type of trading applications seeks to access high impact news or
key economic data before all competitors.  It takes advantage of few

milliseconds delays when data is pushed through cables from one city to the other.
Consequently, many speed trading firms have installed their offices near major

stock exchanges to reduce the time delays.  This gives them the privilege to be

the first to access major economic news such the ADP or Non Farm.

When the competition became intolerable, a fairer infrastructure

(without discrimination) has been put into place by the exchanges. 

Here is a trading video that explains all.

The rivalry was more dangerous among these HFT firms than it was 

among traders on the trading floor in Chicago or New York.  The current

scenario is similar to the American film Wild Wild West.  Though, no

blood has been spilled, their ramifications if they are not properly

handled can destroy wealth or even enslave many.

Distressing factors

1/ Computerized trading software can send phony or dubious buy or

sell orders into the market in real times for the sole purpose to trap

competitors and level 2 traders.

2/ Millions of sell or buy orders can be cancelled in few seconds

leaving other market participants with losses.

3/ Warfare style mind games or real time trading psychology tactics

are frequent on all major social websites.  Proprietary trading software

are deployed to gather vital
financial data from social posts, and gauge the market environment

at any time.

4/ Quite often, long term investors see their investment portfolios

swing up and down at a frenetic speed.

5/ Market places such as New York or London are now an open battlefield

for top rated computerized mind games.  No cost is too small when it comes

to upgrading trading technologies.  More robust trading computers and

finest brains both in the technology and financial fields are working

round the clock to supersede others.

6/ Regular speculators or scalpers and liquidity traders are fleeing

the market

                                                                           


Trading game

At the forefront of the trading game are the smartest market

participants who always pay heed to others. They seek to go into their

minds in view to predict their next move.  

However, apart from the mind games, a real computerized trading

game has intensified since 2009.  The opening bell mainly in New

York and London signals the start of the most rewarding and entertaining

computer game ever played by addicted gamer in South Korea. 

Image:  South Koreans

playing computer game

Though, young south Koreans played all night long, but may be

exhausted at the end, trading algorithms do not get weary.  Round

the clock, they execute orders then compete with other trading

firms.  They recognize how human beings (individual day or

swing traders) trade.  They can easily trap or trick them.  They

are prompt, robust and unfeeling.  They are also active gathering

valuable financial data that serve to build more robust trading

programs.  Though they assist, they do not get pay, but they

enhance speed trading firms.

In addition, regular traders and general investors who grow to

be accustomed to these new market players make a complaint, and

call for their curtailment.  Some try to understand how these machines

work, and how they can limit them.  Many traditional scalping or

investment strategies that helped before become obsolete.  The

competition is real to all day traders, scalpers, investors, speculators,

short, medium and long term market players.  Earlier rules have changed.

The market is more volatile than before.  Some traders have left, some

have changed their trading style to adapt to the new game.  Social

websites have also noted a substantial rise
in the number of posts hash tag HFT or algorithm trading.  Many content

creators on YouTube posted various educational videos about this

phenomenon in the financial markets.  Angry investors contacted

the SEC, and politicians to express their fear.  The trading game is

not only played on the trading computers screens, but also on

mainstream media such as the television, major news papers and

the political arena.

The biggest losers

The biggest losers are long term investors who sold out their holdings

to prevent further losses after  wild swings in the financial markets

(only to notice the next minute, hour or day that stocks have quickly

recovered all their losses).  The draw down is not only financial, but

also psychological because they will kick and blame themselves for

being too reactive.  They may live the rest of their life leaking their

wounds and cursing the markets.

The biggest question

Image:  Big question mark

Should governments prohibit high frequency trading or any form of

trading software?

The right answer is no, but effective rules must be set to restrain

several Wild Wild West
trading machines.  The majority of these trading algorithms do not

adhere to the trading triangle, core market principles and patterns. 

Therefore, they infringe them and create dangerous price distortions. 

The flash crash in May 2010 is a reminder that machines can fail. 

They may destroy more wealth than the humble short sellers that

have been banned in some countries.

On May 6 2010, Dow Jones Industrial Average (DJIA) has lost 800

points within half an hour.
This time it was not the blameless short sellers, but a new breed of

trading applications.  One should recall that in 2008 during the

financial crisis, short sellers were wrongly vilified for being the

real cause.  Most regular investors applauded when France and

other countries outlaw short sellers.  These investors could not

comprehend why Dow could crash so fast and low on a day when

the market was bullish.  This was a wake up call.

Furthermore, investment firms were inundated by telephone

calls from distressed clients who want answers.

Why a market that was rising suddenly gave up so fast all

previous gains?

On social websites, all fingers were pointing to the aggressive

algorithm trading firms.  Meanwhile, investors who wanted

peaceful sleep called for a total ban of high frequency or quantitative

trading.

Theoretically, trading software, algorithm or any automated proprietary

trading tools built by computer engineers who do not grasp basic market

protocols, patterns and principles can create havoc in the financial markets. 

Indeed, if a market is distorted, it will rectify itself unless it is suppressed

to a certain degree.  Market corrections are vital parts of market cycles

but sharp corrections (usually painful and abrupt) come from overdue and

cumulative distortions.

Though, one should not stop these trading software or firms, they ought to

pay heed to other market participants.  They could do their uttermost to

develop friendlier algorithm that adhere to basic market patterns and

principles.  The future will tell if human beings cause worse market

crashes than these trading programs or if these machines can help

prevent vicious sharp corrections. 

Surely, no one should tamper with market ups and downs.  Markets

do not always rise, there are harvest times (bearish seasons) when

assets become inexpensive and wealth changes hands.  Consequently,

one ought to implement both bullish and bearish trading strategies. 

Delight in the sweet and sour of the stock market by learning how to sell

when it is time to sell instead of being an eternal bull.