22 February 2018
Gary Wright

Gary Wright

Gary Wright - BISS Research

277Posts 1,059,432Views 369Comments

Who wins with Algo trading

10 February 2011  |  3804 views  |  1

Algo trading is very much under the spotlight right now and certain to be so for some time yet. The new group set up to look into the affects of Algo trading on the markets should provide some interesting conclusions but will they be able to alter the dominance of this type of business?

Who actually benefits from Algo trading? Certainly large banking and investing institutions but what about the average man in the street. They are obviously unaware of what it is or what does or does not do for them, but this should not mean the market can disregard their interests.

Could the world survive without Algo trading? Obviously yes! Do we need Algo trading? Yes and no!

There is little doubt that Algo trading brings many benefits with reduced margin in pricing and probably costs, once all things are considered. But the problems as a consequence of Algo trading with increased risks and the creation of a two speed market and can cause transparancy issues. Any market struggles if there are differences in pricing and timing. For example a Grocer selling apples at one end of the market will need to know if his competitor selling at another price is attracting business. The speed of this information allows the Grocer to react and change prices. In the pretechnology days, the LSE operated simarly, with Clerks or Blue Buttons as they were known then, running arround the market checking competing Jobbers (Market Makers) prices.

The result was that the Stock Exchange index rarely moved more than twenty points a day (bar crashes) whereas today the Index will fall in hundreds of points for no apparant reason other than a Algo trade has triggered mass buying or selling. Is this good for the market? It's very hard to say yes, as only the few large houses or those technically profficent gain.

Algo trading is here and it has to be managed, but under the existing market arrangments it looks risky for all and provides a volatile market where money can be made in huge numbers but at the expense of the majority

So is Algo trading good or bad for the market?        

Comments: (2)

Roy McPherson
Roy McPherson - Macroy Consulting - Maldon | 15 February, 2011, 11:41

Good or bad its here to stay, I understand that over 50% of all spot fx electronic platform trades stem from Algo trading, that's an awful lot of trades. I think some of the bigger banks will say that pricing in the fx market is too transparent.

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A Finextra member
A Finextra member | 15 February, 2011, 11:51

Thanks Roy

Yes the Genie is out of the bottle and we now have to find ways of ensuring a fair balance in the market. I really dont like regulatory barriers but fear thats what might happen

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job title Analyst
location London
member since 2007
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CEO of B.I.S.S. Research, founder of the BISS Independent Accreditation for all systems and services provided to financial services companies internationally. Guest Lecturer at Reading University and...

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