0 What are Automated Trading Systems? The Pros and Cons

Imagine if a bot could also indulge in trading on your behalf? The current era of trading is based on an automated trading system(ATS).

• Introduction

As technology evolves rapidly, So do our lives has led to revolutionary lifestyle modifications. Virtual assistants and bots, powered by artificial intelligence and machine learning, have emerged to assist us with our professional work life as well as everyday activities. A simple command can get all your work completed, be it switching the lights on/off, playing music, doing shopping online, replying to questions, etc.

Now, Imagine if a bot could moreover do trading on your behalf? An automated trading system (ATS) – a dream come true for many, It can ensure revenues without the intervention of any individual. The stock exchange adoption rate for automation has been extremely high, where 80%-90% of stock trades are performed by programs rather than individuals( Stockbrokers ).

The realm of virtual market trading has encountered vast diversification in recent times, with online platforms that have revolutionized how investors study and execute orders. Interestingly, the notion of algorithmic trading (or automated trading) depicts the next phase of this evolution and is already starting to influence liquid and high-value entities such as the forex market.

In easy terms, algorithmic trading enables investors to stabilize fixed rules for trade entrances and exits, which can, in turn, be executed automatically online. This can enable you to optimize it with efficiency and the volume of orders finished in real-time, potentially stimulating returns for smart investors.


• What is an automated trading system?

An ATS (automated trading system) can encourage individuals or companies to enhance their trading efficiency through the rapid execution of trading strategies. Through this technique, one can partake in financial markets with the assistance of a program that is built to execute a particular set of regulations for entering and exiting a trade. Automated trade enables us to know multiple trades in a brief period, besides,  eradicating the ‘emotions’ related to trading decisions.


Automated trading systems are moreover sometimes cited as algorithmic trading, mechanical trading systems, or system trading, which once programmed can be enforced automatically through the software. The mania of algorithmic automated trading is thriving in currency markets, where banks are increasingly reducing back on trading teams and relying more on the automated trading systems to bolster trading efficiency. 


For instance, JP Morgan’s algorithm recognized as DNA (Deep Neural Network for Algo Execution) amalgamates various algorithms to shape a single strategy that enables the framework to know the procedure of executing a customer’s order. Another algorithm seeks to minimize the market influence by executing in a productive and precise manner. 

EBS, an electronic trading platform, had figured that 70% of orders on its platform are developed through algorithms, as compared to 2020 when the whole trading was done manually.


How do automated trading systems function?

The initial step is to specify a platform that meets your managerial requirements and determine your trading strategy parameters. The 2nd  step is to utilize your own trading experience to curate pre-set regulations and conditions that the algorithm will utilize to place trade orders on your behalf. Facets such as the timing of the trade, opening & closing rates, and quantity are required to be specified. 

For instance, ‘buy 100 shares of Walmart when its 50-day moving average surpasses the 200-day average’. The strategy/rules fed into the automated trading system will continuously scrutinize the prices in the financial market and perform a trade if the pre-set parameters are fulfilled. 

Various automated trading platforms have “intelligent strategy builders” that facilitate a user to make choices from a list of leading technical indicators to curate rules which will be utilized to enforce automatic trading. Still, many traders choose to program the strategies and indicators on their own by functioning closely with the system programmer. While this technique gives tremendous flexibility and can be incredibly rewarding, it needs more from the user. There are grey areas related to algorithmic trading, still, and we’ll evaluate the pros and cons of this Automated Trading in this mentioned points below.

• Pros of automated trading systems

1) Emotions are regulated

With automated trading systems in place, emotions can be resisted at bay, enabling traders to stick to their agendas strategizes. The automation of trade through pre-set laws doesn’t give traders the possibility to question the trade. Also, it enables several traders who are prone to overtrade at every chance, maintain a balance of their trading actions. Warren Buffet had once said, “If you cannot regulate your emotions, you cannot regulate your money.”

2) Backtesting

Backtesting is a procedure that enables a trader to browse the viability of his/her trading strategy by utilizing historical data to evaluate profitability and risks. Since the computer or software is powerless of making random guesses, a trader needs to acquaint properly by correctly defining the regulations and situations. Traders can test these regulations on historical data to specify the risks before actually putting their capital in live trading. This enables them to evaluate and fine-tune their trading techniques as well as determine the average amount a stock trader can lose or win per unit of risk.

For example, you can forecast the profitability of trading oil futures, one of the greatly prominent commodities, during a recession utilizing earlier trends. Backtesting enables traders to optimize their trading strategy based on how nicely or how badly it’s functioned in the past. All in all, automating this procedure can reduce the environmental risks involved in trading.

3)  Convenience and speed

Mechanical systems like Robo-advisors are susceptible to traders with various categories of experience. Because of automation, trades have moreover become exponentially quick compared to previous decades. Being able to react automatically to unexpected market changes is a huge trading benefit.

4) Establishment of discipline

Due to the establishment of trade regulations and automation of trade, there is a sense of strict discipline even in the most erratic markets. Frequently discipline is lost due to assumptions and emotional characteristics that steer them such as the anxiety of taking a loss or avarice to make more revenues. With an automated trading system, a trading agenda will be executed as scheduled. Moreover, the risks of entering the inaccurate order quantity are reduced. For example, the command to purchase 100 shares won’t be misread as ‘  Purchase  1000 shares.’ 

5) Trade diversification

Automated trading systems traders to trade multiple accounts at the exact time, enabling them to supervise their risks better by circulating them over several instruments, also developing a hedge against declining positions. What a computer can accomplish in milliseconds, can never be efficiently accomplished by humans. 

Automated trading systems, enables traders to establish specific rules for both trade entries and exits, that once programmed, can be automatically carried out via a computer. Relying on certain regulations, as soon as a trade is entered, any orders for protective trailing stops and profit targets will automatically be developed.


• Cons of automated trading system

1) Technical downfalls

Overarchingly, the procedure of automated trading seems relatively easy – set up the software, make rules, and watch the trading happen. In reality, although automated trading is an intricate trading method, it still can make errors. Due to internet problems, it might be possible that the order might not get generated. Or maybe, “theoretical trades” created by defined strategy turned into real trades due to some unlikeness in the platform. It is often notified to start with trades that are minor in size until the automated trading system “learns” and refines its procedures.

2) Manual monitoring

Although the trading procedure is automated, the system still requires some degree of monitoring. This manual monitoring needs to be fulfilled to reduce and check potential technical negligences, internet or server issues, system crashes, etc. ‘anomalies’ may arise in an automated trading system that could miss/skip orders or duplicate orders. With steady monitoring, these problems can be rapidly recognized and resolved. For instance, in 2010, due to an algorithmic mistake, there was a huge trillion-dollar stock market crash.

3) Overfitting

 In machine learning, overfitting means developing a statistical model with more data than is crucial. Trading algorithms tend to be fed with too much historical data. That’s not inevitably bad, but overfitting can steer to the inflexibility of trading strategies in the present and future situations. This is why backtesting, while beneficial, is not credible. It builds a bias for positive outcomes and provides the impression that a specific strategy will perform precisely as foreseen in a live market.

With such a great adoption rate in trading, automation is here to dwell. The objectivity, accessibility, and speed it gives make it a strong and valuable tool for traders. Still, automated trading systems should not be left unmonitored. Careful analysis and insight are crucial to avoiding a domino effect of algorithmic mistakes.

4) Over-optimization

Traders who utilize backtesting to fine-tune their techniques may develop systems that work great theoretically but execute horribly in a live scenario. Severe curve-fitting develops a trading plan that is doubtful and incompatible with live trading. Many times traders tend to speculate that a trading plan must contain all productive trades to never suffer a downfall. Such a ‘near perfect’ plan can also languish in the live market.


5)  Tech dependence:

Automation, however flexible it may be but it is not always foolproof. Professionals predict that the downfall of trusted algorithms is bound to happen — and this can transpire in a ‘series of cascade failures’ for financial institutions of every scale. It already occurred during the trillion-dollar stock market crash of 2010, which was an outcome of algorithmic mistakes.

Even for small-scale trades, a stagnant internet connection can already be terrible. Trading occurs in a fast-paced domain, and responsible technology infrastructure is significant for staying ahead of the curve.

ATS gives many benefits to traders but also carries any risks with them. Few of them are-

• Some Advantages Of ATS (Automated Trading System)

         i.            Minimize emotions:- ATS reduces emotions since trade orders are performed automatically once the trade rules have been met, traders will not be able to stammer or question the trade.

       ii.            Proficiency to backtest:-  Backtesting techniques on historical data, enables traders to discover how productive a strategy is.

      iii.            Preserve discipline:- Because the trade regulations are ascertained and trade execution is executed automatically, discipline is preserved even in markets.

     iv.            Improved speed:- Since computers acknowledge instantly to changing market conditions, automated systems can develop orders as soon as trade norms are met.


Some Disadvantages Of ATS ( Automated Trading System )

        I.            Logic correction:- Logic must be tradable, in a live market and it cannot be scanned by backtesting.

      II.            Coding:- It is hard to define every regulation in the coding language due to the constraint of programming.

    III.            Order execution:- It faces problems sometimes while execution, in between market order and stop order.



Yes, automated trading systems do boost the efficiency of the trades but it isn’t a fool-proof strategy and shouldn’t be contemplated as an alternative for mindful trading. While there are many advantages of an automated trading system, we should moreover keep in mind that such a technologically developed system can still have obvious pitfalls.

 Platforms that give server-based automated trading solutions can enable to minimize internet-related technical problems. It is recommended that one must have specific trading proficiency and experience while considering to commence trading via automated trading systems. It is nice  to go ahead with a ‘hybrid Trading' which is a mixture of manual and automated trading.


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