The advantages and disadvantages of automated trading for retail investors

Today’s banks and hedge funds specialize in bringing the power of automated trading to retail investors. In order to make their investment successful, retail investors should automate a proven trading strategy. They need to develop, test and carry out the proven investment strategy regardless of the fact that they are a day trading or running a quantitative investing system. This trading gives retail investors the opportunity to carry out ideal risk management in order not to have negative outcomes. It also gives them the chance to compete with large institutional quant funds and to use certain predictable behaviors of funds due to capital and regulatory constraints.

Automated Trading Give Retail Investors Huge Opportunity

Automated trading gives a retail investor all the means to play freely and to generate significant returns in small markets in contrast to institutional funds. Crowding the trade is one of the advantages of this kind of trading because retail investors’ funds suffer from staff turnover.  Because retail investors have low capital base, they can play in high liquid markets without having substantial market impact. Any retail investor can produce their own algorithm and invest their money if they have deep understanding of the markets and a technical analysis background. There are several new businesses pup-up that will allow you to turn your idea into automated trading system.

With specific emphasis on risk management we can say that retail investors’ advantage is the fact that they are small in comparison with the larger quant funds. Retail investors can deploy their preferred risk modeling methodologies without any risk management budget and risk management department enforcing oversight. However, this does not mean that retail investors should not be careful to risk management. Retail investors are concerned only with absolute return in this case because in the retail environment there are no deployment rules to follow and they do not need to supply monthly performance reports which save them some time. Technology is a significant advantage for retail investors in automated trading. Retail investors are not concerned about firm-wide IT or policies legacy systems integration.

However, trading in this manner has some disadvantages for retail investors and the most important one is that they do not have access to credit-providing institution or client’s news flow from their prime brokerage. Back-testing is another disadvantage for retail investors in this kind of trading because all back-testing systems are very sophisticated and complicated.

In conclusion, we can say that automated trading gives significant advantages for retail investors over the larger quant funds. All these advantages can be exploited by retail investors if they have deep understanding of the markets and a technical analysis background.