The Impact of Computers in financial trading
Three years ago, I read an article in a newspaper about doctors modelling a three-year-old child’s brain using latest technology computer. They did so to identify and remove a tumor in her brain. Various approaches to perform the surgery were discussed and the girl was saved. Without the use of technology, the fate of the girl could have been different. Such has been the impact of technology in various fields. But what about financial trading? Computers have also entered this field, but what has been the impact?
Almost all fund houses now employ sophisticated computer programs to invest and trade in the market. But surprisingly, the use of computers hasn’t changed the way market functions. If anything, the arrival of these super computers should prove to us, that there are people who are serious and who make money like a business from the markets. As you might be aware, markets run based on simple human emotions of fear and greed, and even today, these factors continue to drive the markets.
A trading operation involves, market side as well as trader side functions. Technology has streamlined the market side operations while on trader’s side, computer systems are largely used to mitigate the emotions of traders, Simply said, these computers have reduced the emotional involvement of traders in markets. But they haven’t replaced the need an actual individual’s ability to think well under pressure.
More Volume, More Money:
With the invention of computers, since emotions are taken away, fund managers use them to do secondary processes like portfolio designing and modification. These processes involve a lot of number crunching and used to be tedious, computers have made this job easier. Faster execution of orders is made possible through computer system and it is quite natural for a market participant to take advantage of that factor.
These things have paved way for more money and the volume of trades have increased exponentially.
Risk management has been an area of concern with these computer systems. Many computer programs have been found wanting in this regard. some software programs are bound to be over reactive to market news and may result in bad trades.
The Same old numbers:
Some fund managers, like the mathematician Jim Jones has created various mathematical models of the markets and have made billions, these “quants”, people having a mathematical eye on the markets say, they can predict opportunities to make money from their models. But these models haven’t been able to change the price action of an asset or derivative contracts. They have humongous volumes of data regarding years of market operation, right from the ticker tape era to the latest super computers, that have altered “their approach to markets”, but it is worth while to note that this hasn’t significantly impacted the way a market functions apart from a few technical glitches.
Numbers create structures. Whether it is a computer or a human, the ability to read these structures is an invaluable asset for a trader to posses.
Even though computer systems are here, a traders need to be disciplined hasn’t been replaced yet, so a retail trader has to focus on his disciple. Nothing much more in this aspect for a retail trader.
To an unbeliever, arrival of these computers may give an idea about how this stock trading is being done as a business through out the world.
Many sophisticated computer programs have been created, but we don’t think they have outsmarted Charles Dow and it may not be possible for computers to do so.