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The Current State of Financial Markets and Quantitative Trading
What does the current playing field look like?
Currently, only large players in the financial market have the resources to deploy and trade with algorithms. In recent years the volume transacted by algorithmic trading firms has increased to such an extent that a majority of orders in the financial markets are executed automatically by algorithms. For instance, a 2019 study showed 92% of Forex trades were made by algorithms and not manually by humans (Kissell, 2020).
However many people are still trading manually. These are often retail investors or small players who are looking to grow their money. Over the last 10 years, interest rates have essentially dropped to 0%, coupled with inflation, most people with savings accounts are effectively losing money. This has led many to look for alternative ways to beat inflation, most commonly by trying to participate in the financial markets. This, along with the rise of platforms like eToro and RobinHood has led to 25% of the stock market now being owned by retail investors (Winck, 2020).
Retail investors typically do not have access to the advanced technologies the big players are using to manage their investments and therefore have to resort to manual trading. These investors do not have the time and the capacity to manage their investments actively and often are not allowed to invest their capital in algorithmic trading firms as they do not meet the minimum amount of capital required to participate.
Moreover, the big players are quickly consolidating their power. As more and more assets are managed by these quantitative trading firms, the market becomes highly centralised and is dominated by whales. Smaller players, often individuals and small firms have an incredibly high barrier to entry and have serious difficulty in attracting capital from other investors and therefore they struggle to grow as much as they could. In order to attract customers these smaller firms would have to report on their performance, but this introduces an inherent conflict of interest as quants have an incentive to report too optimistically.
These issues will continue to widen the already huge chasm between the big algorithmic trading firms and the smaller players. The rapid growth and adoption of expensive cutting-edge technology in financial markets will only benefit the wealthy few. It is unfair and quickly getting worse.
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Last modified 6mo ago
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