What changed?

System Trading

Oct 05

Algorithmic systems are based on backtest. However, changes can impact the market such as when the market changed to trading in fractions to decimals.

Recently we have had several changes that theoretically could impact any trading systems:

  1. Micro contracts were released by the CME for many popular products. Before the micros, small traders were forced to trade the mini’s which could easily put them at a disadvantage or encourage them to use too tight stop losses. The smaller contracts might also lead to more hedging from options traders.
  2. TD Ameritrade and Schwab have both announced commission free trading.

Now, we do not know how these changes might affect the behavior of the markets or even if they will. But, these events and the dates around them bear watching for any changes in structure that might invalidate or otherwise cause changes to trading systems.

Some changes that they might theoretically cause:

  1. Miro traders might increase the algorithmic trade, allow smaller sim traders to get into markets, etc. This might in general make markets more efficient and erode any edges. It might also make it easier for traders to trade a winning way. Conversely, if markets need to move to liquidate traders then they may need to move more.
  2. The lower fees might lead to increased trader. This might lead to traders also placing more limit order trades or smaller trades. Not really sure how stock traders behave.. They might average in or buy more.

Ideas? What do you think?

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.