Here’s a staggering statistic: 85% of trading is now automated in the U.S. That means the vast majority of Wall Street trading operates automatically.
As a result, markets like China, where 95% of trading volumes on exchanges as big as the U.S. are still done manually, are losing out.
Automation is a seriously powerful weapon. But when only 5% of trading in your market takes place this way, it can be tough to know where to even start.
Fortunately, there are ways around this, and new approaches to the problem — like the ability to purchase pre-made trading algorithms, and Alphanu’s new marketplace-based approach.
To understand the urgency of this situation, we’ll need to look at why automation is so powerful.
Why Automation is so Powerful
There are lots of reasons why automating your trading can be transformative. Let’s break down some of the most important ones:
- Automation helps minimize the impact of human error and emotion. People are emotional creatures, ruled more often than not by our hearts than our heads. Trading is no exception, and traders frequently make a whole range of expensive mistakes like focusing on short term gains over long term performance and misjudging their own ability. With automated systems, there’s no place for anything but cold, hard rationality.
- With automation, it’s possible to backtest. This means applying new trading models and strategies to historical market data, allowing traders to trial run these new approaches before applying them in practice.
- Automated systems deliver much faster entry speed, joining and leaving markets much faster than humans would be able to. They can also set stop losses and profit targets to minimize losses.
Why Sticking to Manual Trading is a Huge Disadvantage
On the flipside, relying on humans comes with all kinds of issues. It means slower trading and leaves you at the mercy of your own or other traders’ emotions. Over time, this can be extremely costly.
Without the ability to backtest, traders are forced to trial new trading models in the wild, without any kind of practice run. It’s like performing a play without a dress rehearsal — but with potentially much more money at stake.
By sticking to the manual approach, traders can lose enormous amounts of money and find themselves forever playing second fiddle to those who have the means to automate their trades.
It creates a pretty unpleasant situation where one elite group of traders (for example, the U.S. market) is able to outperform everyone else. So how can the average trader in China access this kind of technology and reap the benefits?
How to make automated trading accessible to everyone
The problem until recently has been that automation has been exclusive to the rich and well-connected, particularly in Western nations. It meant hiring your own talented developers to build effective trading algorithms, something which doesn’t come cheap.
There have been some attempts to solve the problem. In China, for example, it’s possible to purchase trading algorithms from developers. The problem is that they haven’t been made with the help of any actual traders. The result is an algorithm which isn’t anywhere near as effective as one that’s been put together using real trading expertise.
To fix this, we need to bridge the gap between successful traders, and those who want to emulate them.
This is what Alphanu wants to do. The company, ex-Wall Street veterans, has built a SaaS marketplace designed to allow traders in the commodity market to sell their algorithms to others. It’s a win-win: successful traders can make money by sharing their methods, and other hopefuls can access proven algorithms that have been tested on the ground.
It allows traders, even those in manual-dominated markets like China, to enjoy the benefits of automation without having to be incredibly rich and influential.
What Lies Ahead
Initiatives like this will become more and more necessary if we’re to level the playing field and allow ordinary traders to compete fairly with the world’s biggest markets. And with China increasingly competing for a place in the world’s top financial league, this is something their traders will be keen to make happen.
Technology has a way of bringing equality to the world. There are 2.7 billion smartphone users in the world today, many of whom live in developing countries. As automated trading becomes more accessible to markets outside the West, the playing field is truly being leveled.
Disclaimer: This is a contributed article and should not be taken as investment advice