Ask an Ex-Banker: Algorithmic Trading

A version of this post appeared in the San Antonio Express News


Dear Mike,

I spotted something on algorithmic trading on your blog, and finance and investment are a bit of a hobby of mine. I am sending you a press release about a Canadian trader who has worked out a successful trading technique based on an algorithm, and a new trio of former Harvard fellows have made an app allowing you to do it yourself.

Here’s an excerpt from the link he sent me:

AlgoTrades, the leading provider of automatic investing systems for individual investors, and EquaMetrics Inc., the leading provider of algorithmic trading systems and their Intuitive, drag-and-drop interface that lets you quickly build and edit complex algorithms – in a matter of minutes, today announced a strategic partnership that will arm both active traders and investors with the ability to have the AlgoTrades investing system traded for them, and build trading systems of their own[…]
Algotrades is seeing increased demand for its existing automated trading systems. The Algotrades futures system is hitting at 100% accuracy for the first 6 months of this year with a ROI of 12.3% to date. Max peak-to-valley drawdown is 2.4% and many of our clients are asking for more diverse and active automated trading solutions to expand their portfolios.

This intrigues me: My question is: What is your gut feeling about this? Apparently some of the big news journals like Barron’s and the Wall Street Journal gave this coverage, so it might be something, or not? Any ideas about it?

–Willem from the Netherlands

Dear Willem,

You probably saw on my site that I’ve written reviews of three books on this topic: Rishi Narang’s Inside the Black Box and Michael Lewis’ Flash Boys, as well as a review of a book by a friend from a high frequency trading firm who says Lewis got it all wrong, Flash Boys: Not So Fast.

As for the opportunity described in that announcement:
I would run, not walk, away from anything like that.

I have a long list of reasons for this advice, but I’ll just name a few.

1. Algorithmic trading typically involves high volume trading activity. For an individual investor the trading costs and – equally importantly – the tax bill make this extremely tax and cost inefficient. Brokers and certain types of professional institutional investors get trading costs lowered dramatically, and are not subject to the same capital gains tax laws as individuals (at least in the US) based on high volume buying and selling of stocks, so they don’t have that inefficiency problem. But for you, high volume trading is likely deathly to your individual account, due to costs and taxes.

2. The ROI (Return On Investment) claim in that press release makes me very wary. Even assuming its true, this is an extremely short time horizon, and barely tells us anything, except the juicy part, namely 12.3% ROI in just 6 months’ time.

In my experience, professional investors who can consistently achieve 12.3% ROI over 6 months (24.6% per year, annualized) never, ever, (ever!), seek to share that technology with others. They don’t market secrets like this. Why should they? Instead, they just quietly compound 24.6% per year for a few years and they can get extremely wealthy all by themselves.

3. Be skeptical of groups or strategies that claim high returns over short time periods, and market their services and technology to the general public. Many strategies can make (or lose) impressive amounts of money over a short time frame. If the strategy could – reliably, provably – earn that kind of return over 10 years, now I might be interested. But again, see point #2 above, because those folks wouldn’t be interested in sharing the strategy with you or me if they had a 10 year track record of 24.6% annual returns. They’d already be extraordinarily rich without us.

4. The successful institutional algorithmic and high frequency traders that make money have extraordinary advantages over individuals trying to mimic their techniques. The kind of traders described in Michael Lewis’ Flash Boys for example, invest tens to hundreds of millions of dollars in software and hardware to give them every technological advantage over the kind of individual traders targeted in this press release. I simply do not believe this ‘algorithmic app’ for individuals could possibly compete with the knowledge, technology, and capital of established firms in this competitive space.

In sum, and to recap: Don’t walk away.




Please see related posts:


Book Review of Flash Boys by Michael Lewis

Book Review of Flash Boys: Not So Fast by Peter Kovac


Book Review of Inside The Black Box by Rishi Narang

As well as:

Would You Like to Understand High Frequency Trading?

The Rise of the Machines



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5 Replies to “Ask an Ex-Banker: Algorithmic Trading”

  1. I followed some retail level algo traders that had live accounts following their trades. As more and more retail money piled up, inevitably they blew up within 2 years or 500 trades. If someone is selling a system with a live track record, it’s possible they had a hidden account taking the other side. If done right, this results in no market impact, allowing “systems” that work on simulator to appear to work live. Reports I’ve read from people going from sim to live with short term system is usually that the live performance is much worse (if trading in the kind of size that retail commissions don’t take too big chunk of the trade).

    I recently read a comment that ‘business doesn’t run at lightspeed’ – most succint explanation about why short term trading is bound to fail eventually – no doubt there’s a % of day traders that are profitable *for now* but that’s likely a statistical anomaly – given enough short term traders, there’s bound to be a few on a very long winning streak but it’s more likely luck than skill.

    However if one if able to write an algorithm that waits for rare extraordinary circumstances, one might be able to get some short term “scalps” done with some reliability.

    The problem with this approach is that there’s a capacity issue – rare small scalps tend to need leverage to get meaningful results and this means the capacity where the trade stops working is reached more quickly. Thus no one is likely to share such strategies. Assuming they even work at all. I can “reveal” that my own track record attempting this so far is making quick % and then going to lose %% – just when I thought I “figured it out”. I’m working on solving this issue – somehow.

    Another “failed” strategy is the “buy it all” approach. I read about it and thought it was a joke but came across an example where someone in 80’s bought “all” silver (allowing them to set their price sky high) but when it came time to sell no one was willing to buy and existing silver items were turned into form that could transact against the futures contract that had been cornered.

    Now if you can find something (like famous art) that there really is limited quantity then that can work better but I suspect that the process of flipping the art at +%% can take a while (over a year) and to make %%/year you’d need a lot of it.

  2. My AlgoTrades Horror Story!

    To anyone out there who is entertaining a subscription to Chris Vermeulen’s AlgoTrades – Don’t do it!
    Listen to Michael of Bankers Anonymous and Don’t walk away. Run!
    I recently lost over $40,000 with AlgoTrades, the algorithmic trading service being hustled by Chris Vermeulen.

    Vermeulen shut down his original AlgoTrades rollout from last February 2014 and reintroduced a new and improved version with a new name called Investor D30 on September 1, 2015.
    Of course, Vermeulen does not indict his new system for the first month’s 30 % losses since the new rollout of his algorithmic product on Sept 1, 2015, but rather cites the unusual volatility of the recent markets as the culprit.
    Vermeulen, also known as the Gold & Oil Guy, was indicating in the weeks leading up to the recent rollout of his “new and improved” version of AlgoTrades that the soon to be released upgraded version was “rocking it” with over $8,800 profit in 34 days and this was the last chance to get in. I lost over $13,000 inside of the first month. Wish I would have passed on that last chance to get in!
    Chris Vermeulen indicates in a video marketing the new AlgoTrades Investor D30 that his proven system will make money in up, down and volatile markets. Then he refers again to the unusual volatility as the culprit for the “new and improved” rollout’s inability to perform.
    A subscription to AlgoTrades only costs $3997 annually. Believe me, it hurts when you pay somebody almost $4,000 a year to make you money and they lose money instead. And to think I was leaning towards a second subscription to invest up to $300,000 in my self-directed IRA, because Vermeulen was not shy in advertising his system’s approval for investing IRA and Roth IRA accounts.
    I always thought that traders liked volatility and thrived in fast up & down markets. That sure does not appear to be the case in my experience with Chris Vermeulen’s AlgoTrades.
    In my opinion, again for what it is worth, you are better off with a service like MarketClub where you control your entries, exits and sizing based on your processing of the information presented to you.
    Putting money into AlgoTrades is not investing, it is gambling.
    Know that AlgoTrades and all of Vermeulen’s enticing charts are before his system went live with other peoples’ money. He looks great in practice, but loses big when the real, live game starts. Learn from my first-hand $40,000 loss ( OUCH ) in AlgoTrades and steer clear of it for your own good.


    The AlgoFool

    1. Sorry to hear all that, thanks for the message. I hope you don’t mind if I add my own editorial comment on your comment, which is that people should probably be skeptical of MarketClub as well, whatever that is. TBH I’ve never heard of it, I just think these things tend to help the sellers more than the buyers…

    2. Chris Vermeulen’s AlgoTrades is down 49.6% tear to date. Just to clarify – the new and improved InvestorD30 is down 49.6% since its unveiling in September 2015. Combined with the original AlgoTrades Futures, before Chris Vermeulen’s tweaked new version failure, this year’s losses are much greater than 49.6% for AlgoTrades subscribers.

      Unless you want to part ways with your hard earned money, take AlgoFool’s and Anonymous Banker’s advice and run. Don’t walk, run!

      Try to contact the testimonials listed in Chris Vermeulen’s AlgoTrades website that reads like a used car bible.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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