The use of trading systems, in general, is an
effective alternative to increase the liquidity of financial markets without,
however, raise the speculative risk relatively.
According to a study published in "The Journal of
Finance" in February 2011 entitled "Does Algorithmic Trading Improve Liquidity?" Provides a study which argues that the use of trading systems in the U.S.
market enhances liquidity and informativeness of orders. In their study
estimates that for large stocks in particular, the use of trading systems
narrow spreads, reduce adverse selection and reduces the uncovered positions.
The trading systems nature provides this type of phenomenon.
The diversity of trading systems can be compared with the diversity of market
participants, contributing to market efficiency.
However, the trading systems have are different when it
comes to diversification. The development of a system undergoes maturation and
enhancements that make emerge a variety of different rules and conditions, with
different timing.
The systems allow an even greater diversification than many
market players together. After developing a successful trading strategy, it is
possible to climb into other assets. If we take one simple example, where two trading
systems with different timeframes, trading the same security can increase the
volume without increasing on the same rate the risk (because now we are
considering the correlation between the models and not between the securities
anymore and they have different buying and selling orders), contributing to
increase liquidity.
The great difference is the scientific process in which the systems
are developed and to the systematically apply. Of course, the systems depend on
market conditions to work as desired. A quantitative investment management,
need to constantly manage the models that operate in that situation. In a
situation of crisis, the systems can be switched to other more efficient for
this kind of scenario can be reduced and the exposure of assets to maintain the
level of portfolio volatility.
Several models can also be profitable in crisis situations.
On high volatility periods, the market often distort much their prices,
creating opportunities for arbitrage, for example, a strategy that profits from
the difference in prices between different assets.
