What is Robot Trading & Should You Be Worried?

By Dale Gillham | Last Updated 09 February 2021

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Could computer algorithms be affecting the share market and therefore, your potential returns? We’ve been keeping a close eye on automated robot trading systems to see how these machines will affect market volatility and share prices for human traders. Robots are capable of placing 150 trades in just a few milliseconds and with rates as mind-blowing as that, it’s no wonder we’re noticing a massive impact.

In this article, we’ll take a closer look at how trading robots work and what you can do to beat the power of automation. Read on to find out why you should be aware of what’s happening in the market, so you can look after your money.

What is a trading robot?

A trading robot is run by fully automated trading software, and is able to buy and sell shares in the official market - alongside the likes of you and me. Forex (foreign exchange market) robots have transformed market conditions, introducing algorithmic trading that allows computers to instantly carry out user-defined actions (such as an entry and exit) based on set rules.

Set entry and exit rules are dictated by predefined conditions or strategies, and may be based on the expertise of a qualified programmer. The robots are able to trade at a high-frequency, which is much faster than is possible through manual trading.

As of May 2019, automated trading accounted for around 75% of shares on the US exchange market - and it continues to grow in popularity in the Australian Securities Exchange (ASX).

How do trading robots work?

Trading robots (or “forex trading robots”) are developed with a set of parameters that help them to make trading decisions. The way they actually work can vary depending on the type of trading software used, although generally the trading platform allows users to build strategies based on simple selections from a list of technical indicators. This allows them to build their set of rules so trading becomes automatic.

The other option is for users to build their trading robots by programming their own custom indicators, working in partnership with the developer to give themselves more flexibility and control over how they invest.

While there are some upsides to trading robots (they supposedly remove the emotions of trading, increase speed and are said to preserve discipline), automated systems come with their fair share of drawbacks for overall market conditions. Given this, it’s important that, as a trader that you’re aware of the repercussions.

Is robot trading taking your money?

In his article Share wars: how the robots are robbing you, David Potts discusses how the influx of computer-generated trading has built a potentially dangerous environment for investors. Naming them as the “ultimate inside traders” Potts explains that robot traders are able to plug straight into the ASX’s computer and place a trade in just a millisecond. Not only can this drag share prices down, it can also be highly misleading for everyday human investors.

Basically, this high-speed trading has turned the market into a “survival of the fittest” scenario, where a computer program is able to move the market around without any real regard for the underlying price of the share. Human investors are unable to keep up with the almost instant trades made by automated trading systems, and so these computer systems are able to jump the queue - flooding the market with lots of little trades of low value.

But how does that affect you?

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While robotic trading continues to flood the market with lots of low-priced trades, this affects short-term volatility and doesn’t actually affect the overall share market. In fact, these high-speed, high-frequency trades take over the market with fake bits that suggest something is happening and makes manual traders like you think something is happening. Then, they cancel a transaction a millisecond before the market opens.

David Potts interviewed me in the article, and I had this to say about my concerns around robot trading:

“They make the market much more volatile and unpredictable. It's like a marathon race. Someone sprints for 10 minutes and gets out in front but the pack catches up.

The whole idea of speed trading is to catch you out, so the solution is to look at the bigger picture.

Don't trade day by day. Look at the market on a monthly basis and say - what is the real trend?''

Again, always look at the bigger picture and avoid day-trading or trading against the robots. You should also avoid looking at depth when making a trading decision as this is not the reality and could lead to a bad investment.

Automated trading software continues to make the market more volatile which will mostly affect short-term traders and day traders. Even more concerning is the fact that brokers are now moving into “dark pools” to escape the robots. A dark pool is a private exchange that has no transparency. While speed-trading advocates claim that this practice creates more liquidity, the reality is that this is drained into dark pools and the official market is no better off.

Find out more about how you can beat speed-trading

Don’t let automated Forex trading or any other trading software take your money. My advice for beating speed-trading robots includes:

• Buy only quality stocks on a medium or long-term basis
• Always track your order to check that the transactions are actually happening
• Remember, any large price swings in one day are short-term changes and don’t mean anything

To find out more about trading robots and hear more essential tips, listen to Robot Trading War: Part 1 and Robot Trading War: Part 2 podcasts from Wealth Within. I’ve covered the effects of automated robots on manual traders, so you can gain a deeper understanding of what to look out for, as well as ways you can counteract the impact.

Wealth Within are Australia’s expert advisers in share trading, offering the only internationally recognized, nationally accredited Diploma of Share Trading and Investment. If you have any questions for me about how you can ensure you’re not affected by changing market conditions, send me a message or call 1300 858 272.