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There will be speculation on what percentage of trading is caused by Algorithms.

Technically most orders are initiated by algorithms as brokers use algorithms to get you the best outcome. However, estimates are that about half of all trades originate from Algorithmic trading strategies, and rebalancing algorithms cause another 30%.

Twenty or thirty years ago that was close to zero. So how did we get such a shift? Algorithms must be better … or are they?

Algo’s are never on holiday and have no emotions.

They can read emotions, but they don’t get emotional

People like you and me are emotional beings. We love a laugh, we cry and occasionally we sulk.

Research has shown that some emotions are very influential in investing: We are afraid to lose as losing hurts more than winning gives joy (Google “loss-aversion bias”).

Most humans also resist change. We’d rather not do anything if it’s not entirely broken (Google “status quo bias”).

The emotion of attachment influences this bias. When people own a stock, they attach more positive feelings to the stock than when they don’t own the stock (Google “endowment bias”).

Algorithms don’t have those biases and they are designed to take 100% logical and high probability trades.

However, algorithms can use emotions: they can read the emotions in a Twitter stream, articles and annual reports.

Algo’s monitor 1,000s of data points a second

While you sit on the beach

Let’s face it; it’s more fun reading a good book, seeing some friends or enjoying time in the sun. Algorithms don’t, they just do, they scan millions of data points and make sense of the data soup. Humans are intelligent, but we cannot process as much information as computers can. This means we are frequently at a disadvantage when making fast decisions.

Algo’s don’t care about time zones

No sleep ’til Brooklyn (for our algos)

There is another interesting bias that most people don’t realise they have: Home-bias (you can google it).

Most of us attach more value to a company in the place we live than in another city and companies from other countries are as if from a different planet.

One of the biggest challenges then, is that, if you want to trade on a stock exchange on the other side of the world, that those exchanges will only be active when you are sleeping (or partying)

Algorithms however, can work 24 hours a day, they never sleep (and they don’t party either)

The Unhedged Algos

The three algorithms that we launched, which never sleep, are relatively uncorrelated (less than 35%), and you can combine them in an innovative way to create a portfolio that fits your risk profile, or you can use one of our algo pre-sets. The Algos are our investment options:

  • Industrial Activity
  • Sector Rotation and
  • Momentum

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Products issued by Melbourne Securities Corporation (MSC). Please consider the PDS and TMD available on our website before applying. All investments carry risks and you may lose your money. Past performance is not indicative of future performance. The information in this report has been compiled from sources we believe are reliable and we make no warranty in respect of its accuracy.