Mark Cuban is a savvy investor who has become a multibillionaire by capitalizing on his business sense, especially in the tech universe. He recognizes the extraordinary edge of computer assisted trading regarding which he said on August 2015: “…algorithms are dominating…It’s truly a ‘Terminator’ market.” In fact Mark Cuban compared the systemic computer automation to insider trading. Imagine his level of conviction and expertise on the topic; he likes to be right and we think he wouldn’t risk making such pronouncements unless he was convinced of his assertions. Dating back to March 2014, Cuban was on air at CNBC criticizing high-frequency trading (HFT). Those against HFT, such as Cuban, believe the technology is equivalent to automated insider trading. Navarro, Bruno J. “Mark Cuban rips high-frequency trading”. CNBC. Needless to say, there’s a lot more to automated trading than grand pronouncements — and the advantages do not eliminate risk. See some performance statistics and find out more.
The Texas multi-billionaire knows a thing or two about technology, investing and even insider trading. He was accused himself of insider trading by the SEC, but a federal jury in Texas dismissed the charges in a hurry after only 3 hours and 35 minutes of deliberation. You see, the clever Mr. Cuban understood what insider trading is and what it isn’t. Let’s follow up on his reasoning with some common sense simple facts and see how systemic trading squares with what is commonly defined as insider information:
Insider trading is a violation because it provides an unfair advantage to people with access to secret information. The most common form of violation is when information that is as yet undisclosed to the public falls into the hands of a person in advance. The edge is really a timing edge; the insider can buy or sell ahead of an event, benefiting from the price change. In the best cases, systems may actually detect such events through the market activity, but the norm is to quantify and rapidly adjust to regular market action. Strangely enough, although the timing and data are not on a level playing field, no rules exist against the equally obvious unfair advantages of computer enhanced systems traders. But why not? Just like the insiders, they can access data faster than ordinary market participants (even if only by microseconds) WITHOUT breaking the law. Demonstrably this is a real advantage, although it does not eliminate other risks of loss in trading. You should review drawdown statistics and assess systems disclosures carefully before investing, no matter how impressive the data. Join us for a quick introductory demo on assessing performance.
Even horse handicappers know that you can’t compare the time of a horse running on a muddy track to one racing on a dry track. In the real world, average investors are running on a muddy track while the inside players have a speed advantage on the inside (dry) track. In the age of technical trading, there can be little doubt that resources such as proper hardware, advanced software and high speed connectivity are all determinative factors in success.
The data is becoming more and more convincing about the benefits of computer engineered trading systems, which is why we give extra credence to Marc Cuban’s observations about automated computer buy/sell signals. As artificial intelligence replaces and outpaces outdated practices in most of our activities, we should become more informed about using these tools for diversification and uncorrelated market speculation.
Bear in mind that although systems trading offers many attractive advantages, you should assess the risk of loss and your general financial condition before becoming involved. Although computer generated models eliminate certain human vulnerabilities in decision-making, they cannot altogether eliminate the risks of the markets. As with all investments, assess the potential risks and rewards carefully and be sure to ask a lot of questions before putting your money on the line. Get informed on how systems work with a short demo.