Algorithm Stock Trading Spreading
By Cho Jin-seo
Staff Reporter
South Koreans' knack for information technology and computer programming is changing stock trading increasingly to an online, computerized affair.
More than three quarters of individual investors are buying or selling stocks, funds and other financial products using Web trading services at home these days, according to Korea Exchange. Moreover, those small-time home traders are using complex computer algorithms and programs, which were used mostly by big firms and investment banks before.
The popularity of such computerized trading has produced venture companies that invent customer-tailored trading programs and provide them to individual traders with small money, who can't afford to hire big, professional investment banks.
``Individual investors often fail to make profit in the stock market because they often make emotional decisions,'' says Joo Joon-seok of Gaea Asset, a venture company specializing in algorithmic trading. ``Most investors know that. But still, trading without emotion is easier said than done,'' he says.
Automated trading systems have been widely used at big stock firms and investment banks. They use computer programs in deciding certain factors of ``buy'' and ``sell'' orders, such as the timing, price and quantity. Those orders often take place in a split second without human intervention to maximize and optimize trading.
A third of all EU and U.S. stock trades in 2006 were driven by such automatic programs, or algorithms, and the figure will reach 50 percent by 2010, according to Boston-based consulting firm Aite Group.
Individual investors with small money have been excluded from these cutting-edge techniques developed by big firms, mainly because the programs and consulting services are too expensive to use for ordinary people who don't have millions of billions of dollars to buy stocks, funds and futures.
It is the advance of information technology that has lowered the cost of algorithmic trading in Korea. Customers only need to link their stock accounts to a trading program of Gaea with a few clicks of a mouse button. Then the system kicks in automatically everyday, sending buy and sell messages with the money. The firm receives a small commission for the service.
The competence of such automated trading systems depends on how profitable and how safe their algorithms make deals, regardless of the condition of the market. Tens of thousands of mathematicians, computer scientists, economists and others with diverse backgrounds are studying ways to make easy and safe money that way. In the case of Joo, he said he developed his ``Aura'' financial trading system while working as a computer programmer for the National Collegiate Athletic Association (NCAA) of the United States.
None of these trading systems could guarantee 100-percent success in a weak, volatile environment such as this year's stock market. And it is difficult to verify efficiency of an algorithm, because few programmers are willing to reveal their secret recipe to others.
However, new, ambitious players such as Gaea are more actively opening such information to their customers and this can stimulate bigger investment firms to be more transparent, says Lee Seok-joon, president of Gaea.
``Korea's big trading firms don't like to show such information to customers because they are not confident with themselves. But we don't have anything to hide because we know our system can deliver it,'' he said.