Algorithmic Trading and Ethics

Alessio Farhadi posted “A.I. Trading - A Question of Ethics” on LinkedIn.  His main point is that machine learning and algos do not have ethics.  His thoughts may be overly influenced by the referenced Flash Boys book that painted the trading industry with a somewhat cynical brush. Just as AI technology has enabled growth in professional algorithms, it has also spurred growth and opportunity for the regulator, broker-dealer, exchanges, and even the average joe who wants to get involved. 

Fairness to the industry requires that one should review the steps that have been taken by innovators, regulators, broker-dealers, and exchanges to mitigate any potential dangers of using computers and algorithms to trade. 

AI, Algo Trading and the Regulators and Watchdogs

The regulators, self-regulatory organizations, and exchanges have all been active in improving the integrity of the industry. These activities include:

• Improved rules that address algorithmic trading (MiFID II, CFTC 1.73, NI 23-103, SEC 15c3-5, CME/CBOT/NYMEX/COMEX Rule 575, …)
• Improved surveillance tools and techniques being championed and shared within the industry including the Futures Industry Association’s Market Access Risk Management Recommendations best practice white paper.
• Exchange hosted and trading system mandatory pre-trade limits and speed limits (CME Globex Credit Controls, Eurex pre-trade controls, CQG, Trading Technologies, Fidessa, and more)
• New registrations and training, (like the FINRA series 99 registration for IT and operations staff)
• Regulators working with federal policing agencies to criminalize cheaters, especially spoofing. (Reference FBI and Michael Coscia of Panther Energy)

AI, Algo Trading, and the Innovators

Innovative firms have seen the need and are helping the industry by responding to the urgent need. The term REGTECH applies here. A few examples include:

• Vertex Analytics with their amazing ability to see patterns in the market data and highlight cheaters.
• Trading Technologies’ Neurensic product that uses machine learning to catch spoofers, front-runners, layering, pump and dump, and more forms of illegal trading.
• Edge Financial Technologies and their KillSwitchPlus tool that catches run away algos and limit breaches at the time of the order.
• Catelas with its surveillance ability to catch collusion between traders or inappropriate use of insider data.

Even the algorithmic trading technologists and firms are getting into the game. At CloudQuant anyone can develop an algo. By democratizing the access to formerly restricted algorithm development tools anyone can participate in the algo world. The restrictions on historical data, technology, capital, and exchange membership are falling. 

AI, Algo Trading, and the Average Joe

Improved access to information is also making it easier for the world to see what is going on with their investments. StockTwits, Alexandria Technologies, Twitter, LinkedIn, Reddit, Quora, and more are all publishing insights into the world. Individuals, both professional and personal, are publishing more insights into the world. Google, Bing, Benzinga, Bloomberg, Reuters, and others are all making it easy to find data that previously were not easily available to the average investor. 

YouTube, LinkedIn, Quora, SMBTraining, QuantInsti and others are all teaching anyone interested in trading and algorithms secrets and insights that 5 years ago were not available to anyone other than a select privileged few at well-capitalized trading firms.

Tools like Python programming language, Jupyter Notebooks, Technical Analysis Library TA-Lib, and CloudQuant are making it easier for anyone to enter the world of algorithmic trading. 

AI and Machine Learning for Algo Trading isn’t to be Feared

Trading moved from being manual pit trading to computer screens. At that time people had legitimate concerns. Those were addressed. Similarly, we are moving to a more algorithmic world of trading. Concerns are again being addressed.   My point in all this is not to contradict Mr. Farhadi's thoughts but to present additional, hopeful information. While the world of investing is changing, the safety systems and the participants are also changing.

This doesn’t mean that the industry should stop adjusting to change. The technologists, regulators, broker-dealers, exchanges, and vendors all need to continue to innovate and adapt. This will lead to an ever-increasing stable and reasonable marketplace where all can fairly participate.

CloudQuant's Production Algos & Ethics

CloudQuant licenses algos from algo creators who use our website and tools to backtest their strategies. During our due diligence process, we review the orders, positions, and trades that the algo did in backtesting. We are looking for any breach of trading rules that may cause issues. As a trading firm primarily we know that the issues of ethics and rule violations are never to be taken lightly. Our licensing process and ongoing oversight of algorithmic trading keep us on a solid ethical footing. Furthermore, all our trading is watched by compliance utilizing technology too.

Happy Algo Trading