Having just read a few books during this time of social distancing, one of them was about the evolution the use of algorithms for automated trading.
The book I read was, “The Man Who Solved Wall Street” by Gregory Zuckerman, which was about the history of systematic trading using quantitative models. The book was also about the life of Jim Simons and Renaissance Technologies and all the people involved such as Robert Mercer.
While the book was very engaging, it was less about the development of the tactics and systems used in making various types of trades, but there were nuggets of truth in the book.
- The first nugget is that the trading machines are programmed to use historical patterns to make automated trades of stocks, commodities, options, bonds or other financial instruments.
- The second is that the machines use algorithms to trade based on these patterns automatically. The machines can only act based on their data inputs and requested triggers.
- Third, the machines only need to be correct (51% or more of the time) to make a huge fortune in trading.
In light of this recent catastrophic event affecting workers, stock markets, GDP and productivity, there are many unknowns. However, there are some new known probabilities:
- Systematic trading uses historical data and patterns. With a calamitous events and government intervention, new patterns and new history gets made. Thus, the machines can’t predict what a government intervention can do? However, they can be bullish in general based on money spent by the federal government.
- Moreover, with QE or “quantitative easing” and new low cost borrowing by businesses, most billionaire investors such as Jeff Gundlach are usually bullish on equities when money is cheap and government artificially supports or creates liquidity.
- The Federal Reserve and the Treasury are determined to maintain order in the markets.
- At this time, the Federal Reserve and Treasury may even be buying ETFs and MMF money market funds along with controlling the bond market.
- According to the news, the government may actually be stabilizing publicly traded stocks or companies which normally would be subject to hedge fund and private equity short selling attacks.
With all of this being said, this is a new and unpredictable paradigm. Even the machines may have trouble keeping up with unchartered human behavior.
Larry Kudlow is now one of the leaders of our economic policy in the U.S.. We applaud his work, and we all look forward to a speedy recovery of all people affected by this pandemic and a speedy recovery to our economy.
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award-winning author and advisory board member to several companies around the world in education, charities, and FinTech Companies.
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