Posted on December 13, 2020 by Florian Buschek
The Market Huddle is weekly show with Patrick Ceresna and Kevin Muir. The have top notch guests like Steve Sosnick, chief-strategist at Interactive Brokers or Dennis Gartman most recently. They talk with macro strategists, market makers or experts with regards to trading, derivatives, fixed income, etc. The show is very funny and there is always something to learn. The two know what they are talking about with decades of experience in the market. They also answer listener questions on the show. Recently the following question came up about “Algos”:
Kevin started his career at an institutional equity desk decades ago and has traded on his own account ever since. So he knows what is going on in markets. His answer was twofold: High frequency trading or HFT is a big component but not directional, those are just trading back and forth and making markets. So it is not that important. However the fast majority of algorithmic trading is not machines trading against themselves or on their own account, but instead simply order execution on behalf of institutions. Mostly this is done via VWAPs (Volume Weighted Average Price). The client would give a huge order to their bank or broker and instead of block trades that were common back in the days, the “Algos” would work off that order all day or even several days or weeks. That is one of the reasons why stocks or markets sometimes seem to just grind higher throughout the day. This is often just the decision of one big asset manager to buy something and necessarily related to any news or makro theme. The two often make fun that the media reports XYZ market or stock is up because of this or that news or sentiment, when in fact it was just an order being executed slowly. Kevin or guests have in fact themselves executed such orders while watching CNBC trying to come up with a reason for the stock moving.
The bottom line is, not every price movement is based on anything new. Prices are just transactions that have been executed, based upon individual decisions. Finally, this is done predominantly via sophisticated algorithms today and those are the majority of directional machine trading.