It is one of the new catch-phrases in the financial services industry, and to be clear – it is taking the world of investing by storm. Just take precautions to make sure you’re not swept-away and don’t confuse the noise surrounding a new idea with a squall.
Algorithmic trading is a way of implementing technology to execute large orders using automated preprogrammed instructions which attempt to account for variables of time, price, and volume to package into smaller orders which are sent out to the market over time. Using this methodology, it is possible to manage positions without a human having to watch over a stock to work any given position in the market.
While this does lower many of the costs associated with the actual trading of a stock and subsequently managing a portfolio, it has challenges that have only just begun to make themselves apparent. For example, not complete enough of a historic factual history is programmed into the algorithm to make a more “considered” response to any given fluctuation in the marketplace. This leaves the program vulnerable to moving in the wrong direction at the wrong time and jeopardizing longer term performance. Also, individual or smaller group considerations may not be properly accounted for in the programming of accounts managed to the greater-good of the program and as such may leave those people inadequately prepared given their own situations.
Very much like it was written in the book Counter Investing – Richard Brooks, 2017- “What’s a cheap price on a bad trade worth?” [page 118].
Without the sensitivity that comes with a well-informed and properly trained advisor in close contact with the investor and his or her portfolio of investments, how can it be expected that the winds of time will blow in the direction needed at the time when the stockholder is expecting it to be there? This is reminiscent of the calls to option and limit trading that has been condoned by some practitioners over the years. Mostly, these strategies benefited the traders in many cases making those same recommendations due to fees generated by that activity.
I’m not suggesting those methods of trading securities don’t work, rather, when properly exercised over the appropriate size portfolios they can perform a service. But, that is not often the case that those criteria are met and again it benefits those providing such services.
And, lastly, asking a program to account for more ambiguous guidelines at the same time as monitoring dynamic events effecting any given investor’s life is asking for trouble in this advisor’s opinion. Unless of course, one is quite young and has a significantly long time period to commit said dollars in which case, rolling the dice with those preselected numbers may work fine for the end user.