At the same time, trading venues have become more complex, order routing and commission agreements more opaque and executions more instantaneous — literally measurable in microseconds. For trading application developers, it is like an arms race just to try to keep up.
Nonetheless, these technology advancements have provided retail traders with better market access than ever before, both in terms of real-time quotations and trade data as well as efficient trade execution.
The standards for investing applications have gone up significantly, and investors using an app to do their trades now expect a clean, simple interface, effective and elegant execution alternatives, even cryptocurrency options.
With trading commissions now at zero or close to it industry wide, trading is more appealing than ever to individual investors.
This can be seen by the record number of new investors signing up since commissions fell to zero on the major e-brokerage platforms. One of the industry’s biggest players, TD Ameritrade, gained over 600,000 new accounts during the first quarter of 2020 alone. Other big players like Schwab, Fidelity and eTrade experienced similar gains.
All of these firms share common characteristics: strong brands built through decades of retail advertising, and trading applications built atop legacy technology, some of which dates back to the 20th century.
But the truth is that the historic bull market we all lived through did not inspire much genuine innovation in trading applications, just incremental improvements. Retail traders still trade mostly based on gut-feel, untested strategies, and tips.
Recent market volatility and rapid price fluctuations have proven difficult for them, causing many missed opportunities and panicked market exits at the worst possible time.
Millions of new online brokerage clients will likewise be slow-moving and ignorant of the kind of trading strategies that can be used to profit from market volatility, leaving them as easy targets for high-frequency traders and arbitragers.
Indeed, today’s retail investors still lack a crucial set of functionalities that keeps the playing field tilted in favor of institutional traders, which is the ability to make faster, analysis-driven decisions in dynamic market conditions that are backtested and strategy-based.
For institutions, this plays out in the form of algorithms that are able to identify trade opportunities and be able to execute such trades without manual intervention.
Few day trading apps are designed to compete with quants or prop shops. We shouldn’t expect individual investors to spin up an entire technology stack in a Florida mansion estate, as Ken Griffin famously has done at Citadel today.
But the broader concept stands: these professional players are able to research, analyze and capture alpha because they rely upon automation that is precisely aligned with their view on a given instrument, market or counterparty.
In short, they use algorithms to get trades done, and spend their day mining for value instead.
The next wave of applications should do the same for the individual investor.
Today’s Millennial and Gen-X traders are considerably more sophisticated than their counterparts of years past.
Apart from more closely aligning trading goals with execution, algos also encourage curiosity. This second element is crucial because frankly, today’s trading apps lack inspiration (and sometimes, availability).
The tools required to properly research an idea, to visualize it and then backtest it simply aren’t there. Some online brokerage apps claim, for instance, that their education hub will “grow with you,” surfacing new ideas as you go. But without a set of pre-established algorithms to deploy, that growth will be limited.
The joy of an algo-driven trading program lies not just in its ability to learn on the fly to protect your trades.
There is also an elegance involved when working with algos, tweaking them this way or that and figuring them out. They make for better trades, but also better traders.
Whether you’re an agnostic, evangelist or skeptic, there is no denying that cryptocurrencies will have a significant role in the future of investing—going far beyond simple stores of value to pairs trading and, still higher up, complicated fund portfolio management and rebalancing.
Market events, like the highly-anticipated Bitcoin halving countdown later this month, are likewise tricky to trade and rife with speculation.
For as much attention as crypto has gotten, they can be harnessed far better by an algo than by a trader trying to keep an eye on the many different trading venues simultaneously, some of which get extremely illiquid when large orders hit.
This will be particularly true as more “traditional” markets begin introducing regulated fund and derivative instruments on cryptocurrencies.
Ironically, the more mainstream cryptocurrencies become, the more complex the trading around them is likely to get. Algorithms will likely be the only way for individual investors to bridge that gap.
Finally, a note about the current market: algos are readymade for volatility. It is unfortunate and tragic that the pandemic was the so-called “Black Swan” event that jolted investors out of their somnambulance after more than a decade of steadily rising market values.
Of course, we all realized that some sort of market correction was inevitable, but few of us were ready for it when it hit. And as the new brokerage account numbers prove, many investors — particularly younger investors — have waited for this type of moment.
How do they navigate this interregnum, with so much uncertainty still in play? The answer is clearly to have the right trading tools at their disposal.
There will be a lot of feeling around in the dark during this period; it is the nature of volatility that some ideas will prove to be wrong.
So trading apps need to be up to the task of exposing investors to pricing and market data that is relevant, present it in a way that is actionable, and with strategies at hand — algos — to animate sound decision-making.
Until recently an investor needed to be a coder and understand a lot of complicated math to be able to even design the simplest of algorithms. Even with the requisite coding skills, the cost and effort required to set up a functioning system to algo trade are such high barriers that they keep most investors away.
Only Streak (Disclaimer: The author is the CTO at Streak), which launches in the United States next week, removes these hurdles and enables investors to create, backtest and deploy their trading ideas and strategies without having to write a single line of code, or to worry about any of the complexity underlying the algorithms it uses.
Algorithmic trading brings lots of advantages. Part of it is the automation — being able to do a trade without checking over and over throughout the day if a limit up or down has been met, for instance — but it is also about sophistication.
Many traders today are using trading techniques like mean reversion, momentum indicators, volume weighted average price (VWAP), and price action.
Currently they need to switch back and forth between trading screens and spreadsheets. And in the time it takes to do this manually, the market often moves away.
Built from the ground up rather than resting on a legacy trading platform, Streak offers the unique ability to take trading ideas from charts and backtest them immediately to estimate the validity of the strategy in less than a minute.
It also enables traders to deploy their algos in the market using AI and machine learning so that they don’t have to worry about sitting and staring at their spreadsheets and their screens all day long. Traders can just set their strategies and walk away.
With the recent spike in market volatility, the democratization of investing is more crucial than ever. And with over 300,000 retail users who have completed more than 27M backtests and generated over $700M in traded value, the Streak platform is on a winning streak all its own.
(Disclaimer: The author is the CTO at Streak)