Algorithmic Trading

Artificial Intelligence and investing have one precise thing in common – they are all about numbers. Naturally, therefore, the rise of A.I. will impact investing and trading. But will it be a real game-changer and automatically enable higher returns? What to expect in the coming years?

A.I. Is reliable, Fast and Effective

Fundamental analysis is a time-intensive task for investors. For example, manual research of key financial figures like

  • Market cap,
  • Earnings per share,
  • Revenue or
  • Profit estimates

can easily cost hours or even days of work. In addition, comparisons against competitors in the same industry and sector, cross-checking of SEC filings and supplementing technical analysis make it even more complex.

Artificial Intelligence algorithms do in seconds what investors currently do in days or weeks. Computing power is far beyond any expectations of 10 years ago. Quant investment procedures and high-frequency trading already dominate Wall Street.

Hedge funds are specialized in trading shares of Apple, Netflix or Tesla to make a profit of a cent or less per share. However, the combination of trading frequency and high-speed trading executions enables institutions to generate millions of dollars in profit, even if the profit per share is minimal.

Algorithmic Trading Software Makes A Difference

In the past, stock market analysts, investors and traders read the latest news and analyzed market trends to identify entry and exit points. These days, institutions hire armies of mathematicians to decode the market, write API protocols, and use the stock analysis software with A.I. power to determine the best trading and investment strategies in each market cycle.

Computer algorithms only know 0 and 1, while people have a gut feeling. Furthermore, humans are influenced by various surrounding occurrences and may make different investment decisions even if the fundamentals are the same.

The computer is not only more precise, but it is also way faster. That’s true for more than just analysis. It is also the case for order routing and trade executions on exchanges like the New York Stock Exchange and Nasdaq.

Hedge funds and other institutional investors pay enormous sums to have their servers and data centers as close to the physical location of the stock exchange as possible. These days, milliseconds make a real difference in trade executions and profitability.

Everything from hardware to software, skills and infrastructure needs to be perfect for the best possible results. So even less apparent things fastly become the main point of interest. Cutting edge cables, for example, push HTF traders closer to light speed.

The benefits of hollow-core fiber – the latest generation of fiber-optic cables improve the speed by billionths of a second and not more. But precisely, this speed difference decides the make or break when trading stock on Wall Street.

Algorithmic Trading Strategies

A company listing on the New York Stock Exchange and Nasdaq comes along with various regulative requirements defined by the SEC. For example, companies are required to publish earnings every three months. Those reports are typically reported outside the regular trading hours.

Companies like Apple Inc., Amazon.com Inc. and Netflix Inc. report after market close, while other companies like Pfizer Inc. and Exxon Mobil Corporation. This way, unforeseen irrational moves in reaction to announced company figures during regular trading hours are avoided.

Decades ago, analysts began reading those SEC filings one page by the other to better understand the company’s financial situation and interpret the company’s valuation relative to the competitors and price per share. Today, A.I. is used in the financial world to read and analyze company announcements and SEC fillings.

The majority of data is comparable, like the balance sheet or various financial KPIs. But the A.I. does not only search for company finances within those fillings. The computer programs also scan for important keywords that allow conclusions about the current situation, market perspective and company outlook.

Robo Advisors

Retail investors often use robo advisors to manage a portfolio. Artificial Intelligence algorithms often supplement robo advisors and help re-balancing portfolios automatically. This can be for a portfolio with diversified stocks or assets like exchange-traded funds.

The main benefits for investors are the low costs of using robo advisors and the comfort of getting access to a robo-managed portfolio with minimal self-managed trade execution activity. Saving time and money are great arguments for using robo advisors, while there has yet to be proof that A.I. for retail investors works better during more intense market corrections.

The market correction between January 2020 and March 2020 was too short to finally conclude how well A.I. helped investors since the market rebounded from its lows to new highs within five months. Also, the recent consolidation in the first months of 2022 did not show a big difference in A.I.-managed classicly-managed portfolios. Only time can tell if trading algorithms remarkably benefit the retail investor.

Digital Disruption Across Multiple Finance Sectors

Digital disruption changes the way we live and how we work. It revolutionizes sectors like the finance industry. As a result, more and more companies identify ways of using state-of-the-art technologies to grow into new business leaders. For young investors, it is a matter of course that companies can keep pace with the latest technological developments, be it mobile banking- electronic banking or real-time trading.

One of the latest well-known fintech trends is blockchain technology and the associated cryptocurrencies like Bitcoin, Ethereum and Litecoin. No other area in the financial sector is currently as influential as crypto. As a result, more and more platforms, services, and providers accept cryptocurrencies as payment methods, implement relevant APIs, and develop products related to the technology, like Non-Fungible Tokens.

The A.I. trend is here to stay. It will continue to influence our lives. Artificial Intelligence will help companies increase their profits, reduce risks, and develop even more valuable solutions for investors.

Is algorithmic trading more profitable?

Yes. Algorithmic trading is typically more profitable since it reduces human error to a low level. Still, low latency internet connections, excellent trading strategies and trading tools are required, be it for stock trading, trade forex, or other securities. Our article covers the best algorithmic trading platforms with reliability for the best possible UX.

What is the success rate of algorithmic trading?

Algorithmic trading has similarities to traditional investment strategies. The development of automated strategies and algorithmic strategies is the most demanding task. Trade executions and tracking are the least challenging. The listed platforms work best for algorithmic trading of stocks, cryptocurrency and futures.

Alexander Voigt, CEO
Article by
Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.