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Stock Exchange Robots: Profit Factor or Smashup Machine?

06 August 09:17 AM

To be with a robot or not to be? That is the question for a modern trader, who lives in the world of automation, where money is shoveled up by stock exchange cyborgs. However, due to their limitedness, they use this shovel to bury profit or, as it has recently happened to MICEX, “present” your millions to other players.

So, are machine trading systems good or evil? Why is robotic use so limited in the West? Why does MICEX-RTS introduce hard restraints and the system of fines for the owners of robots? How can some traders earn 7 382.58% of yield with the help of MTS, whereas others suffer a loss? Will robots lay hands on the world of finance if today their share at Western or Russian exchanges already amounts to over 80% from the total number of transactions?

Robots are the lords of financial profit

Robots are one of the most ideal tools of getting quick and high income at Forex market, as said by Andrei Goilov, the head of Analytics Department of RoboForex, the company equally popular in Russian and in the West. However, at present currency and stock markets situation with robots resembles a tug-of-war between those who have learnt to earn with the help of trading advisors and those who do not know how to use them. This is the source of disputes about the effectiveness of trading advisors and experts. Nevertheless, it is an undeniable fact that no person can physically earn maximal profit in minimal time, having thus held thousands of transactions. Whereas trading machines do this all the time since the end of 1980 – the moment when first stock exchange robots were involved in trading at New York Stock Exchange NASDAQ.

Is it possible to gain 7 832.58% profit in less than three months? Yes, this is real, according to the specialist of RoboForex company, which was acknowledged the best world broker by work with robots and Forex advisors in 2011, according to the results of Masterforex-V Academy broker rating. However, this concerns only high-quality robots, such as the winner of the contest “Best Private Investor – 2011” or the winner of “Automated Trading Championship 2011”, which has been organized by the world designer of automated trading systems MetaQuotes Software Corp for six years already (popular trading platform MetaTrader has been produced by the company).

“By the way,” adds the specialist, “this year our company has become the silver sponsor of this unique contest. I believe that this is a rather conscious and rational choice, as RoboForex company currently provides excellent conditions for traders that use robots in their trading practice. Cooperating with MetaQuotes Software Corp on a permanent basis, we orient at our clients’ interests; therefore, we provide only most modern, most progressive trading opportunities in terms of technology with the use of automated trading systems. We hope that this year the results of the championship will overcome the previous ones, and the best works of its participants will show strategies that would be applied to real Forex market, working with no failures or mistakes, and thus holding most profitable transactions.”

It is worth mentioning, according to the jury member of Automated Trading Championship 2012 Andrei Goilov, that by the results of Automated Trading Championship 2011 the victory has been assigned to the robot designed by Igor Korepin, which has increased the starting deposit in 13 times – from 10 000 to 113 000 dollars, having thus gained 4 520% of annual profit – one of the highest results at Forex market.

Speaking about stock exchange robot designed by UnitedTraders.com, it has increased the starting value of 155 000 Russian rubles to 12 million by means of future and option transactions at MICEX. Besides, it has become the most dynamic robot, having held about 25 000 transactions in one day.

War for stock market robots: people may lose

“Speaking about mistakes that robots make,” explains Andrei Goilov, “statistics shows that people do wrong actions much more frequently than robots. In some cases even with smaller amounts than in automated trading systems. Let us recall the situation in 2008, when a trader of one of the largest Japanese banks “became world famous” by having initiated market crash because of his mistake concerning large volumes. This person has made a mistake while setting market price for extremely large-scale volumes.”

Penalties may be applied to traders, but they cannot be applied to robots, which frustrates those, who are against MTS application at stock exchange and Forex market. However, adherents of manual trading seem to forget that:
– robots trade with such volumes that a person cannot physically handle;
– their quick action cannot be compared to the best reaction of a trader;
– robots are unemotional, as they are not apt to human stress, passion, fear, etc. This serves the basis for their continuous operation with positive results;
– MTS bring most profitable commission fees to brokers and stock exchanges due to the great number of held transactions.

The opinion of RoboForeх expert is supported by independent expert Sergei Cherepanov, vice-rector of MasterForex-V Academy, the head of In-Depth Trading System Study Department of MF. In his interview to the “Market Leader” he explained that these days at Wall Street, for example, over 79% of trading transactions are held by robots. At Russian MICEX about one half of transactions are held by robots, and up to 90% – at RTS market.

As stated by the head of RTS Roman Goriunov, in less than three-year time all transactions at Russian stock exchange will be performed by robots. Today the share of program trading at EUREX amounts to 90%, and the dynamics of robotization is rising rapidly.

What is the reason of such high popularity of stock exchange robots? Sergei Cherepanov explains that in addition to the reasons mentioned by RoboForex specialist, the following significant factors are to be considered:

– robots do not get wages. This is the opinion of many Russian and foreign analysts even despite the fact that the cost of some high quality automated business trade programs may reach hundreds thousands dollars;
– superspeed of robots. Only 3 secondsisneededforthesuperspeedsignaltocoverthedistanceof1 327 kilometers between New York and Chicago, between New York and London – not more than 60 miliseconds. This enables robots to earn incredible sums of money in a matter of minutes if there is small difference in the cost of one share at various exchanges worldwide;
– robots bring more regular profit. 11 years ago IBM program organized the first contest between trading robots and people. In the course of one day six traders were trading contracts for pork supply, trying to overcome one robot. However, the program has shown the profit of about 7% higher than traders. 11 years have passed, and MTS have modernized a lot.

What are the weak sides of stock exchange cyborgs?

Sergei Cherepanov highlights the fact that despite all benefits of trading robots, they have rather serious “weaknesses”. Consequently, results of their activity may be rather poor. A bright example of this is the recent case with a robot at MICEX-RTS, which has been called “rabid” by media.

The high-profile case has been the following: in the course of evening session at MICEX-RBSА a market robot trading at USD/RUB futures in 2-minute time has held transactions that amounted to about 700 million dollars. It was buying dollars at high price (33.90 rubles per dollar), and selling – at low price (32.75 rubles per dollar). As a result, the loss has amounted to about 4.3 million dollars; it has presented a large sum of money to other traders that use manual trade. The management of the exchange has refused to announce the owner of the robot, but, judging by the trading volume, many market players have concluded that the robot could belong to a large bank.

After this case many traders have stated that automatic trading systems will never replace people. What is more, MICEX has officially announced that it will not cancel the transaction because “every participant bears personal responsibility for his robot and its actions, whereas stock exchange bears no responsibility for its actions and algorithms”.

“And this is not the only incident,” says the expert of Masterforex-V Academy, “some time ago software failure became the reason of a three-hour shutdown of a stock exchange, the loss from which has amounted to 5-7 billion rubles.

Foreign exchanges face similar problems. For example, several years ago London Metal Exchange had a serious fever when a mysterious Chinese trader opened many short-term positions, raised prices for copper, and disappeared, without having fulfilled its obligations by contracts.

Due to such mistaken (or deliberate?) actions of trading programs, a new type of robots has appeared at the market, namely, robots that specialize on tracing such mistakes. As a result, the owner of such machine receives additional source of income, which does not require any additional effort, neither physical, nor intellectual. If the injured party addresses its broker or the management of the exchange, which have information about traders who gain profit in such way, an unpublicized rule claims that such “rich man” is to give a half of its profit to the injured party.

The problem of robots has become so significant for Russian and Western exchanges that they have taken measures on considerable limitations of MTS use. For example, as informed by Sergei Cherepanov, the incident with “rabid robot” was soon followed by the statement of MICEX-RTS management that starting from August 01 fines will be imposed on owners of electronic trading systems that spread unfulfilled bids. The fine is officially called additional commission fee that amounts to 10 kopecks. It is applied to market players that have displayed over 100 000 unfulfilled bids at the market. At London exchange brokers trading transactions are stopped for several seconds if the number of such exceeds several thousands.

The expert reminds that one year ago MICEX introduced measures against overactive electronic trading systems. For example, the right of MICEX to exclude such traders from the trading session by blocking his identification number. This concerns players that have broken the limit of 150 transactions or 10 false transactions per second during 5 minutes.

By the way, according to information provided by MICEX, the most dynamic stock exchange robot has conducted the average of 200 bids per second or 6.8 mln. bids daily. However, only 13 600 bids were fulfilled to the full extent. When new rules are introduced, the owner of the robot will be obliged to pay the exchange charge of 44 600 rubles and 591 000 rubles as a fine for extra transactions. This is connected with the fact that robots leave a great number of unfulfilled bids, thus overloading trading grounds servers, which may lead to failures.

Has financial crisis been organized by robots?

It is worth mentioning, according to Sergei Cherepanov, that in 2000 these were robots that made the index at NASDAQ drop by almost 100 points due to massive superspeed marathon of selling shares of large companies. Rather recently, on May 06, 2010, the mistake of stock market robot has lowered Dow-Jones index by 10%, which has resulted into the latest wave of crisis. By the way, current crisis, which started in 2007, has been “organized” by robots that have pulled US quotations of subprime mortgage bonds.

The abovementioned brings up to the conclusion that following the only set algorithm set in robot’s program is their major drawback. For example, in case of massive stop-loss robots simply follow it, whereas people may stop when the price is approaching the stop loss and change the situation.

Moreover, it is an undeniable truth that “flaw” automatic trading systems bear the threat to the stock exchange, overloading it with 90% of unfulfilled (unfinished) transactions.

Speaking about Forex market, many analysts share the opinion that traders that work manually leave the market because its intraday segment is overloaded with robots. It is hard to resist robots, whose work is much quicker. Besides, the high speed of MTS makes it almost impossible to control their trade at Forex.

One way or another, every medal has its reverse. This may be easily applied to robots trading at Forex market. It is up to a trader whether to use them or to trade without them. The only important thing is that your trading strategy brings real results and works without failure.

The “Market Leader” and Masterforex-V Academy hold a questionnaire at Forex forum for traders and investors: Will trading robots conquer Forex?
– yes, their benefits are evident, it is only a matter of time;
– trading robots are good only in close cooperation with people; therefore, Forex is not likely to be conquered by machines;
– no, even the most advance trading machines will never substitute people.

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