Algorithms Still Need Human Oversight
Q&A with Interactive Brokers founder Thomas Peterffy
Traders Magazine Online News, November 28, 2012
Human eyes (and minds) are still needed to manage "position risk,'' says algorithmic trading pioneer Thomas Peterffy, because "we never can be sure our algorithms can never go off the deep end."
Peterffy is founder of Interactive Brokers, which markets an electronic platform known as the Trader Workstation and has used electronics to try and consistently be the lowest cost approach to brokering trades available.
PROFILE: Thomas Peterffy of Interactive Brokers
Traders Magazine: When you started quietly tinkering in the 1980s with an IBM PC connected to a Nasdaq terminal did you ever imagine how far trading algorithms would come in the marketplace over the next three decades?
Peterffy: To tell you frankly, I wasn’t even thinking about that.
Traders Magazine: Yet at a talk you gave some ten years ago you were asked why you were using computer programs to trade and what was the future of human trading
Peterffy: I said that I thought that within five years all trading would be done by trading algorithms
Traders Magazine: Yet the market isn’t quite there…
Peterffy: Yet I’m still convinced that all trading will be done by algorithms.
Traders Magazine: But aren’t you always going to need some kind of human intervention in trading?
Peterffy: It’s really not about that. There is trading that is based on technical fundamentals and trading based on financials. Financial analysis is still done by human beings. But they feed the order into an algorithms and the algorithm executes the order. At Interactive, we have algorithms for our customers that our customers can use for any kind of trading.
Traders Magazine: What will be the natural progression of trading algorithms?
Peterffy: At the micro level they will become more and more sophisticated in the minutia of what it is they do. And then at the macro levels they will have programs of being able to trade entire portfolios at one time.
Traders Magazine: But ten years from now will there any humans trading?
Peterffy: Sure, there will. But they will be human beings using algorithms to trade.
Traders Magazine: And totally human intervention, things like people yelling on a floor, will be gone because it is so inefficient?
Peterffy: That’s absolutely right. The traders will be there to supervise the algorithm.
Traders Magazine: At Interactive, you emphasize taking the human element out of trading and thereby keeping costs as low as possible?
Peterffy: That’s why the average commission at Interactive Brokers is very low.
Traders Magazine: But given these improvements, given the speed of change, can regulation keep up with market developments?
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