A few years ago program trading made frequent headlines. It would whipsaw the market by piling on buys in an up market and piling on sells in a down market. Eventually, the stock exchanges put limit restrictions on program trading that pulls a circuit breaker when trading is moving to fast in one direction.
Program trading of course is computerized automated trading. A trader sets up certain conditions in a computer program. Then, whenever those conditions are met in the stock market, the computer generates a trade that is executed automatically on the selected exchange.
Discount brokers have driven the cost of trading down and have squeezed the margins that brokers once enjoyed. It has become very much a commodity business. Commodity businesses are driven by volume. In order to generate more volume brokers are making program trading available to individual investors.
TradeStation Group Inc has offered this service for years. Fidelity has begun to offer it to traders trading more than 120 times per year with more than $25k in assets. TD Ameritrade Holding Corp plans to offer the service later this year. Others are sure to offer the service.
There are at least three risks I can think of. First, if you set the rules to tight, trading costs can eat up all of your profits and then some. Second, you might make a programming error and trade the wrong way or for a larger amount than you wanted causing you to lose a large amount of money. Third, your model may just be wrong for any number of reasons. You might have discovered a relationship that was coincidental and not causal. That is x did not cause y, but just happened to move as if it did. Or the model worked in the past, but circumstances have changed and it no longer does.
In the right hands Program Trading is a powerful tool that can enhance your profitability by getting you into and out of the market rapidly. In the wrong hands, you can go broke even faster than usual.
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