18th June 2013: Algorithmic Trading Goes Retail

Fortune Magazine reports that EquaMetrics is now selling a cloud-based app that creates Technical Analysis-based algorithmic trading strategies for retail trading subscribers:

 

EquaMetrics’ app is simply designed and since its software firepower comes from the cloud, it doesn’t require anything more than the typical PC. You can drag and drop colored tiles to assemble your own algorithm. Day traders can choose between 30 variables to build their formulas. The options are built on so-called technical indicators, metrics that reflect trading patterns as opposed to stock fundamentals such as the price-earnings ratio. After you’re done, you run the program to buy and sell stocks and currencies.

 

The web application is relatively inexpensive: it costs $99 a month or $250 a month, depending on how many algorithms you want to run. That’s a steal compared to the alternative of hiring a quantitative programmer for $200,000 a year. EquaMetrics gives you the stuff a programmer could produce. Then it’s up to you to assemble your own strategy.

 

I have been expecting apps like this for several months, and have been monitoring other initiatives like the Quantopian community. The popular literature on algorithmic trading strategies evolved from Technical Analysis mechanical systems (Tushar S. Chande’s Beyond Technical Analysis) to back-testing (Robert Pardo’s The Evaluation and Optimization of Trading Strategies) and then to algo trading using Matlab software (Ernie Chan’s Quantitative Trading and his new Algorithmic Trading; and Barry Johnson’s Algorithmic Trading & DMA). This period spans the post-dotcom collapse; the 2003-08 speculative bubble in real estate and asset-backed securitisation; and institutional experimentation with high-frequency trading platforms, and transaction and execution costs.

 

EquaMetrics’ strategy reflects this decade-long evolution:

  • Its initial offering is Technical Analysis strategies: at a time when: (a) high-frequency trading has ‘broken’ many trend-following and momentum indicators; and (b) hedge funds and proprietary trading desks use predatory trading to clean out TA-oriented retail traders.
  • The model is subscription-based software as a service — which could eventually disrupt or change the economics of agile software programming if this offering scales up in a significant way. Will the $US99-250 per month price point remain? Or will another platform develop a lower-priced offering and trigger a ‘race to the bottom’ competitive dynamic?
  • It opens the way for the licensing of specific TA indicators and proprietary methods as ancillary revenue streams, and as a way to build a market around the core product offering (which NinjaTrader, MetaStation, and ESignal have all done with their respective platforms).
  • The quality and scope of the back-tested data is important: quantitative hedge funds like Jim Simons’ Renaissance and David Shaw’s D.E. Shaw & Co each clean their own data.
  • EquaMetrics’ move into fundamental indicators reflects some recently published work on the quantitative analysis of these strategies (notably, Richard Tortoriello’s Quantitative Strategies for Achieving Alpha, and Wesley Gray and Tobias Carlisle’s Quantitative Value).
  • EquaMetrics’ choice of FXCM and Interactive Brokers as prime brokers to process client trades is significant: brokerage transaction and execution costs can mean a potential, new trading strategy is actually unprofitable to execute, or that its profit-taking ability declines over time, especially in correlated and ‘crowded trade’ markets.
  • The focus on TA and fundamental indicators does not address some of the quantitative, statistical or machine learning strategies that quantitative hedge funds use to develop algorithms; how correlation testing of model variables might occur; and what might happen to retail investors once several different competing firms have back-tested and issued dueling algorithms (a factor in high-frequency markets where scalping and order front-running occurs).

 

Still, the EquaMetrics offering has me interested: I’ve been waiting for algorithmic trading to ‘value migrate’ (Adrian Slywotzky) to retail traders, for awhile. It’s a first step towards post-human trading (Charles Stross’s novel Accelerando).