Trading Robots Outperform Humans?

Online, August 29, 2013 (Newswire.com) - Will humans soon be completely outsourced by robots in the trading of stocks, commodities and foreign currencies?

"Not so fast," says James Roth, a senior analyst at AlgoRates.com in the United Kingdom. One of the most successful investment funds in 2012, AlgoRates name has now become synonymous with algorithmic trading, the trading done automatically by computer programs. During an exclusive interview, Roth explains that for algorithmic trading to be successful, it requires expert human analysis and supervision.

The proportion of algo trading in the market is growing fast. In 2006, one-third of all trading in stocks in the United States and Europe was generated by such automatic programs or robots. In just three years, however, that number is up to 73% of all volume in the US equity markets.

At the London Stock Exchange, more than 40% of all orders were generated by robots in 2006. Today, that number is as high as 70%. In foreign currency markets, nearly 45% of orders are driven by automatic programs designed by humans but automatically executed by robots. In futures, bond and option markets, the proportion of algo-trades is also on the rise.

"It was not always that way," says Roth. Algo Capital (http://www.AlgoRates.com), one of the most successful algorithmic traders in 2012, has invested heavily in the past years in developing what experts describe as one of the most profitable trading robots in the market today.

"The computerization of the trading in financial markets began in the early 1970s," explains Roth. "An important milestone of this process was the New York Stock Exchange's 'designated order turnaround' system, also known as DOT. This system was the first to send electronic orders to the market in the US."

In 2001, a team of researchers at IBM (International Business Machines Corporation) in the United States published the experiments they had conducted showing that their algorithms were able to consistently outperform human traders. This gave the industry a push that further attracted participants in the financial markets to algo-trading.

"Machines can react faster to new data, and they have no emotions when reacting. This helps to explain the success of algo-trading and its better performance," says Roth.

When it comes to speed of thought and processing data without emotional hindrances, many experts agree that computers can be more effective than humans. However, Roth believes that their success in ago-trading depends on the development of the most precise algorithms, and the integration of these robots with human supervision.

"The competition is fierce," says Roth. "We are constantly modifying and improving our algo-trading robots to stay ahead and improve our results." This process involves the best computer brains and experienced traders in the business.

And yet, for these robots to be successful, they still need human expert traders to supervise them. "At the end of the day, robots will never be able to completely replace human traders. There are aspects of the market that only humans can understand," adds Roth.

"But the combination of split-second market analysis and decision making by the robot along with our human traders' experience and expertise has proven an unbelievably successful combination."