Algorithmic Trading Latest Trends & Developments Lecture By Dr. Lipa Roitman


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Learn about the different types of algorithmic trading and how it actually works. Algorithmic trading is a growing trend. I Know First has an advanced self-learning algorithm that has helped many investors achieve magnificent returns. I Know First's live portfolio returned 60.66% in 2013, beating the S&P 500 by over 30%!

Published in: Economy & Finance

Algorithmic Trading Latest Trends & Developments Lecture By Dr. Lipa Roitman

  1. 1. Algorithmic Trading Latest Trends & Developments Dr. Lipa Roitman Yaron Golgher Founder CEO © I Know First 2014. All rights reserved.
  2. 2. is a financial startup that provides daily investment foresight based on an advanced self-learning algorithm
  3. 3. We developed an advanced algorithm based on artificial intelligence and machine learning that also incorporates elements of artificial neural networks and genetic algorithms Dr. Lipa Roitman, a scientist with over 20 years of experience, led our R&D team to develop and consistently enhance the algorithm Our live portfolio from 2013 returned 60.66% in 12 months beating the S&P 500 by 31.27%
  4. 4. A unique financial market forecasting algorithm that analyses, models and predicts over 1,400 markets for short and long term: Stocks Commodities ETF’s Interest Rates Currencies World Indices Firms that can consistently recognize the most opportunities and overall trends has the key to the market
  5. 5. What is Algorithmic Trading? General Market Data Market Data Market Data Algorithms An Advanced Mathematical Model Market Data Market Data Buy & Sell Orders 60% -70% of the US equity market volume
  6. 6. Two Methods of Algotrading, High-Frequency and Quantitative Trading 1. High-Frequency Trading (HFT) Real time intelligence, in milliseconds:  Place and quickly cancel small orders to find at what price the buyers and sellers are ready to trade.  Price-volume info to catch developing trends.  Simultaneously process volumes of information - human traders can’t compete.  Liquidate positions at the end of the day. Technological costs of HFT are enormous. High competition-low profit.
  7. 7. Two Methods of Algotrading, High-Frequency and Quantitative Trading 2. Quantitative Trading, or Longer Term Trading Algorithms analyze the structure and the trends in the market, find predictable patterns, and trade upon the machine derived forecasts. Suitable for most investors Some of the trading strategies: Trend following vs. mean reversion:  When to use which? Market neutral Delta neutral Arbitrage
  8. 8. Advantages of Algotrading Human Factors Costs Objective valuation of the stock Psycholgical Pressures Risk Algotrading Quantitative forecasting the future stock trend Lower cost of trading due to the high volumes Volatility Reduced buy-sell spreads, esp. in most liquid securities
  9. 9. Why Governments are Clamping Down on HFT? HFT is unfair to retail investor  The HFT traders have the first choice in the trade - a form of scalping Level field needed to give everyone an equal chance. Several European countries and Canada are curtailing or banning HFT due to concerns about volatility and fairness.  In crisis the algos liquidate positions in seconds, causing huge imbalances and price swings
  10. 10. HFT and Volatility Has algotrading evolved in recent years to pose less risk on the general market? The risk is still present.  Notable examples:  May 6, 2010 Flash Crash. The algorithms may have caused it, but also quickly corrected it.  January 23, 2013 AAPL plunge
  11. 11. Latest in Algotrading Interpreting news and automatic trading by the machines.
  12. 12. It’s all about speed!
  13. 13. It’s All About Speed! Advertising campaign by Dow Jones on March 1, 2008:  Claimed that their service had beaten other news services by 2 seconds in reporting an interest rate cut by the Bank of England.
  14. 14. What is Machine Learning? Mathematics, statistics and logics are the crucial tools in studying the markets. They offer testable, verifiable and predictive hypothesis. Number crunching allows finding hidden laws, not obvious to humans.
  15. 15. Steps in Machine Learning Provide Framework Mathematical Tools Programming Tools Give Examples To Learn From Input Output Fitness Function Sequential What should be An algorithm is a optimized? step-by-step procedure Example: Make more good predictions than bad ones Generalization Requirement Discover the laws connecting the input and output, cause and effect Critical for forecasting ability
  16. 16. Example Goal: Minimize the Fitness Function
  17. 17. What is a Genetic Algorithm? There are a number of search algorithms, from simple to complex, and genetic is one of them. Genetic algorithm is used for the most difficult problems, where exact relationships are unknown, and maybe non-existent. Many solutions are in the “gene” pool, some good, some not so. Each solution is like a chromosome in genetics, hence the analogy. Genetic is a circular iterative algorithm.
  18. 18. Genetic Algorithm Reject Gene Pool Select Genetic Algorithm Mutate
  19. 19. Steps in Genetic Algorithm Genetic algorithm uses these ways to improve the gene (solutions) pool: Combination:  Combine two or more solutions in hope of producing a better solution. Mutation:  Modify a solution in random places in hope of producing a better solution. Crossover:  Import a solution from a similar problem Selection:  Survival of the fittest
  20. 20. A unique financial market forecasting algorithm that analyses, models and predicts over 1,400 markets for short and long term: Stocks Commodities ETF’s Interest Rates Currencies World Indices Firms that can consistently recognize the most opportunities and overall trends has the key to the market
  21. 21. Loyal and Growing Client Base Larger Institutions Hedge Funds Family Offices Investment managers – Fund manager & I Know First subscriber Financial advisors Professional investors Hundreds Of Clients Worldwide I Know First grew 400% in 2013 from all over the world
  22. 22. Academic Cooperation Dr. Roitman lecture in Tel-Aviv University (View it Here) Projects with Harvard Business School Partner with international Universities-internship programs, lectures
  23. 23. Market Trends Transparency S&P 500 Competition There is more transparency than ever of fund performance To retain and attract new investors as well as other mutual funds, a firm should be able to beat the S&P 500 on a regular basis • Competition amongst investment firms is higher than before • To stay competitive investment banks are looking for the most advanced tools to enhance their performance
  24. 24. Customer Challenges Complex Market Evolution The market is evolving beyond previously established theories however customers still expect strong and consistent returns of Traditional Tools and Fundamental Analysis Investment Firms Traditional tools and fundamental analysis are not enough to stay competitive in the contemporary market Investment firms need to stay one step a head in order to be the first to recognize trends and take advantage of opportunities
  25. 25. The Algorithm Tracks and predicts the flow of money from one market or investment channel to another Artificial Intelligence (AI) The system is a predictive model based on Artificial Intelligence, Machine Learning, and incorporates elements of Artificial Neural Networks and Genetic Algorithms I Know First predicts 1,400+ investment channels daily Artificial Neural Networks The results are constantly improving as the algorithm learns from its successes and failures
  26. 26. Synopsis of the algorithm Daily data is added to our 15 years historical file Run a learning & prediction cycle with new combined data. Daily predictions for each stock, currency, commodity, etc..
  27. 27. Daily Market Heat Map Two indicators: Signal – Predicted movement of the asset Predictability Indicator – Historical correlation between the prediction and the actual market movement
  28. 28. XOMA returned 61.45% in 1 month from this forecast Two indicators: Signal – Predicted movement of the asset Predictability Indicator – Historical correlation between the prediction and the actual market movement
  29. 29. Forecast vs. Actual
  30. 30. I Know First Sample Portfolio 60.66% Return in 1-year beating the S&P by over 30% Click To View
  31. 31. Main Features of the Algorithm Identifies The Best Market Opportunities Daily 6 Time Frames Tracks Over 1,400 Markets Self-Learning Adaptable Always Learning New Patterns Scalable A Decision Support System (DSS) Predictability Indicator Strong Historical Performance – 60.66% gain in 2013 The algorithm becomes more and more accurate with every prediction as it constantly tests multiple models in different market circumstances
  32. 32. Algorithmic Trading Strategies To Implement With Mutual Funds Top Stocks Forecast Currencies Prediction Interest Rates Forecast Industry Forecast Customized Algorithmic Forecast Dividend’s Forecast Gold Prediction Commodities Prediction Conservative Stock Forecast ETF’s Forecast World Indexes Forecast Aggressive Stock Forecast European Stock Forecast
  33. 33. Algorithmic Trading Strategies To Implement With Mutual Funds Assess Risk Aggressive Stock Forecasts Conservative Stock Forecasts Assets That Carry A Dividend Aggressive Dividend Forecasts Conservative Dividend Forecasts Recognize Top Performers In Each Industry Bank Stocks Forecasts Best Tech Stocks International Opportunities European Stock Forecast Custom Forecasts Customized Algorithmic Forecast
  34. 34. Algorithmic Trading FIVE Strategies To Implement With Mutual Funds Buy All Assets In The Forecast Of Equal Weights * Live Portfolio is based on this strategy * Only Buy Stocks With High Predictabilities * A predictability of .2 is good but .5 is excellent * Buy Stocks That Have A Strong Signal In Each Time Horizon Multiply the Signal And The Predictability Indicator Together Identify New Opportunities and Double-Check Your Analysis Optimize Returns & Reduce Risk
  35. 35. Algorithmic Trading Tactical Approach The first appearance of a stock does not mean buy it at any price that same day  Put it in a watch list, unless there is significant discount of at least 3% Recognize the general color of the heat map Consider the forecasts for major indexes to get an overall picture of the market trend  We advise not to trade against the general market trend When analyzing stocks, review the specific industry forecast as well
  36. 36. Algorithmic Output Chart: ALU
  37. 37. Apple Inc. AAPL Bubble Crash Financial Bubble Detection
  38. 38. Algorithmic Output Chart: NOK
  39. 39. Two different types of algorithmic outputs  Heat maps  Charts Algorithmic trading is becoming more popular as it has proven more effective than traditional forms of analysis alone.  Algorithm’s are the future of financial analysis Network Virtualization S&P 500 Level of Confidence  The self-learning algorithm not only gives you a prediction but its level of confidence as well Investing Track record of regularly beating the S&P 500  I Know First beat the S&P 500 by over 30% in 2013 Exchanges 1,400+ assets are forecasted Forecasting Key Advantages of I Know First: Algorithmic Trading 39
  40. 40. Recent Publications How Can We Predict The Financial Markets By Using Algorithms? Tel-Aviv University Lecture – Dr. Roitman Seeking Alpha articles – Dr. Roitman Seeking Alpha articles –I Know First Research
  41. 41. Algorithmic Trading With