Monthly Market Video Update


Monthly Market Video Update

What are algorithms? How do algorithms affect the stock market?  In this month’s Video Market Update, Mary Ann Drucker, FSA’s Assistant Portfolio Manager, answers these questions and explains how FSA combats the potential volatility caused by algorithmic trading.
May stock market update transcript

Hello! This is Mary Ann Drucker, Assistant Portfolio Manager with FSA, here with the Market Update for May.

You may have heard the term “algos” used in financial media. It’s short for algorithms, normally a mathematical term, but when utilized in trading, algorithms are computerized programs that automatically buy or sell a particular security once certain predetermined rules or conditions are met.

Now the key thing here is this trading is done automatically by machines. The only time a human being is involved in the process is when those rules and conditions are first programmed into a computer system.

Of course, human intervention is required to make tweaks occasionally, but by-and-large once programmed, these computers can accurately process trades at an astounding speed and frequency, unmatched by any human trader.

And that brings us to why algorithmic training is so widely used. Financial markets have benefited from the higher efficiency and increased liquidity that algos provide. Also algorithmic trading removes human emotions from the decision-making process and can allow for better execution with less disruption to markets when very large orders need to be executed.

The downside of algorithmic trading is the common perception that algorithms have increased market volatility due to the mind-boggling speed with which computers can execute trades in a very short period of time. The flash crash of 2010 has been blamed in part on algorithms.

So what does algorithmic trading have to do with FSA? Well we have no control over volatility in today’s markets whether or not it’s caused by algorithms, but what we can do is help to reduce the effect of that volatility through certain investment vehicles such as open end mutual funds.

Since mutual funds price once a day at the end the day, client portfolios that hold these aren’t subjected to the same kind of intraday gyrations that individual securities can produce. And that’s why mutual funds have been FSA’s preferred choice of investment vehicle in managing client portfolios.

Well that’s it for this May Market Update. If you have any questions about this content, please don’t hesitate to email or call us. Until next time, thank you for watching!

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