The Pitfalls And Power of Automated Trading

Last Updated on October 16, 2021 by Oddmund Groette

In one of my current strategies, I was filled en masse today. Usually, that strategy gives me on average 4 fills a day, but today I got 59 fills. Quite unusual! So I stopped the program because I suspected something was wrong. Having continued the program I theoretically would have got over 100 fills/stocks. When doing automation I always see the black swan in the back of my head so I stopped it. Better safe than sorry, I thought. A quick look at the P/L showed indeed something could be wrong: I was down about 6 000 USD in seconds and I was fearing this was just the tip of the iceberg. After having a quick look at some of my fills I discovered an insane volume, and this was in stocks with no news. Looking at those incredible moves I suspected some automated trading program must have gone completely wrong and my strategy actually will turn very profitable when this selling stops. So I sent the program again to buy some more. And yes, after some 30 minutes everything cooled down and the P/L just ticked upwards securing a very profitable day. This was one of the rare moments in a trading year when the opportunity to make really good money suddenly came out of nowhere. And yet again I sit here kicking myself for not trading bigger size. Good opportunities for us who provide liquidity, but you have to go for the jugular!

Currently, I haven’t seen anything on the news except for some rumors that an algo order that should have been executed over 5 days got executed in 5 minutes. I guess someone will be fired….. Automated trading gives power, but can turn almost lethal when executed in the wrong way. And don’t even think about if the quotes feeding the program is wrong.

Look at BRK/B, PL and DDD today just to mention a few. DDD went from 38 to 34 USD in just some minutes. PL had a range of about 27 to 25.5 once every minute.  PL went about 5% after selling abated, and DDD rose about 9% from the bottom!