Algorithmic trading is changing markets

September 27, 2016 | Rocco Savage

This article highlights the effects algorithmic trading is having on both institutional and individual investors. While we believe individual investors have more options than what is presented, Michael McDonald does a great job describing changes that are happening in the market and the trends that will follow.

The classic Wall Street trader is dead. For decades, or even centuries, the professional investment markets were characterized by smart individuals buying and selling stocks, bonds, currencies, and commodities based on intuition, savvy  valuation skills, and luck. Those days are gone. Trading on Wall Street today increasingly involves computers, algorithmic models, and Big Data. That is true not just in stocks, but across markets. This is fact that securities attorneys need to understand because it dramatically impacts how they should approach their jobs, and the mindset they should have with clients.

Many investors are aware that the old NYSE floor trading is a relic of a bygone era, but even at major banks, the people who work there are rarely traders themselves. Bloomberg recently profiled a top currency analyst, explaining that as recently as 2007, Goldman Sachs and other major firms traded in markets by having a skilled analyst shout trading directions whenever market-moving information like Weekly Jobless Claims were announced. Those days are gone, and that top analyst Bloomberg profiled is today focused on using Big Data to help clients develop better currency trading algorithms.

This changing market structure has dramatic implications for everyone on Wall Street, from traders and individual investors to those supporting Wall Street like accountants and attorneys.

Against this backdrop, individual investors need to decide how they want to move forward. There are only a few choices. In the commodities and energy space, for instance, most individual investors are not going to have the capital or ability to deploy high-speed trading algorithms. Instead, investors largely have to choose between using passive index funds like ETFs and paying for an advisory service or active mutual fund. Advisory services and active mutual funds face the same issue that traders at top Wall Street banks do of course, but they have the capital and capacity to build or buy their own algorithms and quantitative data models.

Read the entire article at: Algorithmic Trading Is Changing Markets

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