Introducing Algorithm-Assisted Trading

Today, I want to talk about an idea I hardly hear anyone talk about but makes so much sense both on paper and in real life. It's called algorithm-assisted trading in contrast to its very popular cousin - algorithmic trading. Now, you may ask, what is the difference between the two? Let me explain. I'll start with algorithmic trading.

Algorithmic Trading

This really involves using the computer/machine to do all (or mostly all) of your trading. Because the computer never sleeps and never gets tired, trading can be done every millisecond, everyday (e.g. currency markets). It's really a very enticing proposition, because if you get all the intricacies right, the promise of making a fortune while hardly doing any work (apart from the initial work of writing and maintaining the algorithmic codes) can hardly be toppled. However, anyone who has done this knows that things don't always pan out this simply. For example, since there is no code without a bug (just think about how many Apple or Android updates you get each month just because they found bugs in their codes!), imagine the very realistic but also painful scenario of your code running amok in live trading just because of a bug you didn't catch during training/development of your algorithmic code (remember even Apple and Google ship codes with bugs even after extensive testing by hundreds of some of the smartest engineers in the world! It will be complete hubris (and a very expensive one at that) for you to think you can write and deploy any code without bugs. The real world never works like that so accept it now - all codes have bugs - and you may just be saving yourself a whole lot of future pain). There are also other issues such as loss of internet connectivity (or even electricity!) during live trading etc that just makes not constantly monitoring (and tinkering) with any algo trader not practical (however companies like Alpaca were created for algorithmic trading so there is clearly a healthy population of algorithmic traders out there). Is there a better way that solves the algorithmic trading "risk" problem but still gains most of the advantages? I seem to think so.

Algorithm-Assisted Trading

Algorithm-Assisted Trading on the other hand is largely human led (as opposed to be computer/machine led) but now relies on the computer to be efficient. Think of the popular science fiction cyborg concept here. A cyborg is really a human that has been "enhanced" by machine technology (computers). Same thing here. An Algorithm-Assisted Trader is really a human trader that has been enhanced by machines. Now you may ask, how can one become an Algorithm-Assisted Trader? Simple. By using a computer and/or machine learning to do most of the analysis a human will do before trading. For example, a huge part of trading is to determine if a given stock is cheap (remember, trading is all about buying low and selling high) to buy. A human trader will probably look at the historical price of the stock, look at its fundamentals and technicals and come out with a prediction of the stock's intrinsic price. If the current price is trading well below this intrinsic price, then the stock is cheap and the human trader goes ahead to buy and vice versa for a sell. Now, an Algorithm-Assisted Trader will probably let a machine do all this analysis using machine learning algorithms like Natural Language Processing or NLP (did someone say Chat-GPT?) and then analyze the results of the NLP engine to ensure it makes sense before placing the trade.
Now, did you notice the subtle difference between an Algorithmic Trader and an Algorithm-Assisted Trader with this example? An Algorithmic Trader will probably have her algorithm do the same NLP analysis but the difference here is that the algorithm places the trades after getting the NLP results. The critical human loop is largely removed! Basically, in the search for speed, Algorithmic Trading tries to eliminate the human element in trading while Algorithm-Assisted Trading basically does a trade-off. By sacrificing some speed in trading execution, Algorithm-Assisted Trading, allows back the human element that can be a life (literally if you are trading your life savings - pun intended) saver when algorithms run amok, which invariably, they always do.

So what do you think? Are you an Algorithmic Trader or an Algorithm-Assisted Trader? Let me know in the comments section.

Yours in learning,

AI+Finance