Robot trading hijacking the trading industry

Robot Trading Hijacked Financial Markets

Sun Oct 17 2021 12:38
Just like in forex trading, trading with robots is possible. The main instance is in 2018 when robots hijacked the financial markets based on one report. This resulted in a fall in the commodity trading market. 

This post will inform you of what happened during that time.

Did Trading with Robots Trigger a Plunge in Financial Markets?

In February 2018, the financial markets took a dive which was a result of robot trading. During this type of auto trading, financial institutions employ computers that are programmed using complex data sets that are commonly referred to as algorithms. 

These bots for trading can spot trading opportunities swiftly and consequently, strike faster as compared to any human. More information about robot trading can be found at Xosignals.

Algorithmic trading, also known as auto trading, has become so popular that several financial expert advisors and analysts claim that more than half of the S&P 500 Index trading is carried out in this manner.

This form of automated trading undoubtedly catalyzed the sell-off that was experienced in that year which resulted in several huge companies losing valuable points.

During this situation, there was a market tumble that was triggered following a report about the job market in the US that was released. The report indicated a strong wage growth but which had not yet been assured. 

However, there was a high-volume sell-on that was based on that news and the decision to sell was most likely made by trading with robots.

What was the Trigger Point?

After the jobs report in the US was published, the stock trading price of the Treasuries or US government bonds fell significantly. The yields, which is the rate of interest that is offered to investors by bonds, surged as the stock trading price continued to fall.

During this period, it is widely regarded that robot traders had been waiting for the yield to get to 3%. 3% is a significantly high figure and if triggered, it would force human investors to convert their shares into bonds. Many people have always wondered why the fall happened.

In this case, the yields from bonds rose greatly towards the lucky number of 3%. There was a 2.9% trigger for automatic share trading to sell and once the trigger was pulled, all the financial markets took a freefall.

VIX - The Fear Index of Auto Trading

Bots for trading and algorithms are typically designed to respond to particular situations and conditions just like expert advisors

One algorithm could operate on a stop-loss basis where it sells a portfolio to avoid incurring further losses. If the index of a certain financial institution dropped say by about 5%, it would trigger the algorithm to sell. 

However, if you owned a large number of these algorithms striking stop-losses simultaneously, it would result in more falls which would produce even more stop-losses.

It is also possible for algorithmic trading to be triggered via Correlation Trades". This is where a market movement in one direction triggers a different trade in another market. 

Interestingly, there was an increase in the value of an index known as the VIX. But goes by the nickname Fear Index since it can determine the volatility of a stock trading market.

Selling Short

On the other hand, these triggers can work oppositely. The majority of the algorithms that were selling equities were selling short. This means selling stock with the main objective of purchasing it back at a cheaper cost and with a reasonable profit margin. 

The great thing here is that the steep falls in financial markets that are caused by algorithms can also be recovered steeply.

You will find that these markets were responding to certain numbers, but they're just one set of figures. Because of robot trading, the reaction of the financial markets to these numbers was exaggerated massively. Therefore, it is true to say that using EA for commodity trading makes financial markets even more volatile.

What Causes Volatility in Markets?

Just like in forex trading, Two main things can lead to a proper bearish market – rates of interest increasing faster than expected, or an economic recession. The rates of interest can increase more rapidly but not excessively so.

Also, considering the strength of the American economy, an economic recession is not bound to happen. That leaves robots and bots for trading as the main cause of share trading price volatility.

We are expected to take it as an authentic reflection of a portfolio's fundamentals. However, when the financial market is experiencing a freefall, people are expected to write it off as a momentary fit of irrationality.

The truth is that the financial market is as divorced and irrational from the fundaments on the way down as it is on the way up. 

This has become the norm in the nature of recent markets particularly because of computerized trading techniques from the wise Wall Street guys. What happened during that time is like herd behaviours on steroids.

Who Does the Majority of the Trading?

It is important to understand that only a small portion of the numerous trades on stock markets are carried out by human beings these days.

These trades include buying and selling shares from one company to the other, and only 10% of those trades are done by real-life human beings. Additionally, about 40% or so analyse their decisions before investing in share trading in a market, industry, or class of companies.

This leaves about half of the stock trading that is carried out automatically by computers. These computers are based on complex algorithms that concentrate on market indexes and price changes that are caused by other computers. 

Given its circular logic, this eventually leads to robots vs robots trading where the fundaments are irrelevant and insignificant to the investor, enormous volumes, and holding times are mostly a matter of seconds or minutes.

More often than not, an auto trade is probably a combination of various trades. It can either be shorting this ETF, buying that stock while selling another call option on a derivative instrument. And the majority of these transactions are carried out using borrowed funds.

Final Thoughts - Is Robot Trading Worth Investing In?

Besides gambling, the rationale for employing these ridiculously complex trading strategies and instruments that have been put forward by expert advisors is that it will increase market liquidity and decrease price volatility. 

This statement is often true until when it is not when it results in a market panic. 

Rather than hedging financial risk, which is the main reason why people purchase these instruments, they end up increasing the risks to the owners and the general financial market.

In truth, the financial system does not have to be so volatile and this complex. There is no reason why bots and algorithms should divert a huge chunk of the much-needed capital and talent, and siphon so much off bankers, traders, and hedge-fund managers. 

With some intelligent regulation, traders and investors could have a financial system that is easier, less risky, less vulnerable to manipulation, and less expensive.
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