If
you are a fan of science fiction movies, probably never watch a film about
humanity against a robot, for example Terminator. No need to fantasize, as real
traders every day against the robot. Yes, not one. Now trading robot is the
latest trend in the financial world. World trade is currently dominated by
robots with artificial intelligence. It is not separated from the development
of increasingly sophisticated technology. This article will discuss the history
of the commencement of trading robots and how we need to react to it.
WHAT IS A ROBOT TRADING?
Trading
robot is actually a form of automated trading (automated trading). Trade
transactions carried out fully automatically by the software and based
programming algorithm (often abbreviated as algo). The software works by itself
and humans only change program parameters. Never imagined such a trading robot
in science fiction, but the tangible trading robot software that resides on a
server (high performance computers). So trader future time is a collection of
servers that run automated trading.
Robot
trading or automated trading is often referred to as algorithmic trading.
Generally any trading robot has its own strategy and algorithm, which is made
by the manufacturer. Strategy and algorithm is called blackbox, referring to
the confidential nature. So that a trading robot is often called blackbox
trading. Every large institution that plays in the financial markets has its
blackbox respectively, ie Chameleon (developed by BNP Paribas), Stealth
(developed by Deutsche Bank), Sniper and Guerilla (developed by Credit Suisse).
Retail
trader was now beginning to use trading robots. For example, which is rampant
carried out by stock traders with online trading software respectively. Or
trader forex, commodities and indices with the Expert Advisor (EA) in
MetaTrader.
DEVELOPMENT OF ROBOT TRADING
History
of automated trading in financial markets began in the 1970s when large traders
were able to perform automated trading contracts on the Chicago Mercantile
Exchange. The next step was made in 1999 when the internet company created the
first retail forex software dedicated to the individual, which gives traders
the means to buy and sell currencies in the forex market directly.
Now
trading robot could receive a message from the market and the algorithm can
identify market opportunities, make buying decisions to buy or sell and process
it in a matter of just a millisecond. So even before you get a chance to read
the news, trading robots already stepped in the market.
The
development of trading robots use very quickly. One third of all stock trading
European Union and the United States in 2006 performed by robot trading. Only
in the intervening three years, in 2009 the use of trading robots to be about
60-70% of the total trading volume in the US. According to the data, trading
robots are now used in 80% more than financial trading transactions, ranging
from stocks, forex, commodities, futures and so on. All the major players, such
as banks, investment funds, and financial institutions are already using the
robot for trading. Arguably the only type of trading is still done manually by
traders and retail investors.
In
Indonesia too, the trend of using trading robots are expected to be more
widespread, along with the increasing use of online trading software.
EXCESS TRADING ROBOT
There
are several advantages of use of robot trading:
1.
The most important advantage of trading robots is the total elimination of the
psychological elements involved in trading. So basically expected trading robot
can eliminate human error (human error).
2.
The second advantage, is the volume of transactions in large amounts that can
be created and sustained. Trading robot can perform continuous transactions in
all markets, to apply the same algorithm over and over again, without pause.
3.
The third advantage is speed. Trading robot is able to execute the transaction
very quickly. If the analogy like the electron velocity. When I first
introduced trading robots, the speed factor into excess. But as more and more
users trading robots, the speed factor is no longer a major advantage.
IMPACT OF THE USE OF ROBOT TRADING
The
use of a trading robot created a trade with the characteristic that high
frequency trading (High Frequency Trading or HFT). Robot trading transact large
volumes of continuously at any time. HFT is generally just looking for a small
profit, but in large volumes.
Due
to the volume of trading done very big, when an error occurs in a transaction
that could be devastating. For example, there are two fatal cases in the use of
automated trading:
1.
Flash Crash. On May 6, 2010, the US stock market experienced a sharp decline.
The Dow Jones Industrial Average fell 9% or 1,000 points in just minutes.
2.
Knight Capital. On August 1, 2012, Knight Capital Group's proprietary algorithm
cause chaos in the stock market. As a result, Knight Capital lose up to four
times its net profit in 2011.
DO WE NEED TO USE THE ROBOT
TRADING?
In
March 2014, Virtu Financial, an HFT firm, reported that during the five years
of 1277 managed to do profitable trading day of 1278. So Virtu only loss in a
single day in 5 years. Claims given by Virtu may indicate that the trading
robots can be profitable.
But
not all trading robots can be profitable. So that could be a profitable trading
robot must have two conditions: 1. Algorithm great. 2 servers were very fast.
As
a retail trader we do not have these two conditions. The servers were quickly
very expensive. The algorithm is greater than the property of the institution
is also difficult to make. Necessary intellectual abilities and very high costs
for research in making the algorithm. Do not compared proprietary algorithm
that large institutions like the mock trading robot that is distributed for
free or sold cheap on the internet. If you like it, may actually end up making
losses trader.
In
my opinion, although the trading robots increasingly widespread, but basically
everything is an extension of human emotions. Human psychology still plays a
major role in the market. And it makes the market psychology is not easily
guessed even by the most sophisticated algorithms. So there is always a chance
for us, traders dinosaurs became extinct, which is still trading manually to
take advantage of the market.