Algos Account For The Majority Of All Trading Volume

In the world of trading and financial blogs it’s easy to get overrun with useless and outright false information.Over the years I have had many brushes with the turbulent world of prop trading, so I can tell you some secrets that pros know and retail traders only wish they knew. Until now!

The following essay is part of a comprehensive series I am posting over the course of the next few weeks in an effort to drive an 800 ton mining excavator through the mountain of mind trash that is preventing you from being a successful trader.

Rule #6: Algos written by smart people account for the majority of all trading volume

The Dunning–Kruger effect is a cognitive bias whereby people with low ability, expertise, or experience in a certain area of knowledge tend to vastly overestimate their ability or knowledge.

It also describes the opposite effect when it comes to high performers who in general seem to have a tendency to underestimate their skill level. As you may have guessed this essay is not about those guys.

It’s about the sort of people who watch an introduction to open heart surgery on Youtube and then think to themselves ‘hey, how hard could it be?’

Or the ones who believe that making it to Grandmaster level in Call Of Duty instantly qualifies them to become an active operator for the U.S. Navy SEALs or the British SAS.

And then there are those guys who open a $5000 trading account over at Robinhood and think that drawing a few lines on a chart and predicting future price action will allow them to make millions and retire in a Swiss chalet – at 35.

Sure pal, that’ll happen.

So let me once again impart a heaping serving of truth about the harsh realities of participating in the financial markets in the 21st century.

No one knows for sure, but the best guess is that on most days, over 70% of the trading that takes place in the markets is generated by algos.

On high volume trading days, closer to 90% of all trading volume is from automated algos.

They are written by extremely smart people backed by firms with tons of trading capital.

Institutional trading firms are always on the look out to recruit the best talent from all around the world.

It’s pretty common to have a department of genius level math PhDs that develop trading algos in addition to a department of super smart software engineers that deploy these algos onto servers for live execution.

Often these servers are placed either directly in these exchanges or at locations nearby just to shave off a few nanoseconds and get first in line to get a good fill.

There are literally billions of Dollars on offer and the big firms leave no stone unturned to eke out even the slightest competitive advantage.

Knowing all this, would you take a trade against an algo, written by a PhD at MIT, that is taking the other side of your trade?

In other words, an algo written and then tirelessly tested by a cadre of eggheads with a mean IQ of > 150 is betting the market is going to end up in the exact opposite direction of the trade you just placed.

What do you think are the odds of you winning that bet?

The answer to that seems pretty obvious but that does not seem to prevent a legion of retail traders from taking trades shooting from the hip or by following untested ‘systems’ like Elliott Wave, Fibonacci fans, pivot points, spiral moon cycles, or what have you.

All the while losing money as if it was an Olympic discipline.

Don’t be that guy. Before you get into the game know what you are up against. And make sure the system or trading style you are adopting actually has a track record of being profitable.

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LIVE cumulative P&L of all my trades over the past year can be found here.

See you on the other side.

  • Mike
  • last year

About the Author

Hey there, I am one of the founding members of Red Pill Quants. I used to work as a systems engineer in Silicon Valley until I left the industry in 2008 to become a full time quant trader. It's been fun ever since.