Updated on Apr 2017
Financial trading is a business that requires an abundance of information. This article tries to detail the role Trade chat is taking in this times.
A trader should be equipped with data and information in order to make the right decision at the right time.
Regardless of what market the trade is done, whether it is the stock market, futures, currencies or commodities, it suffices to say data and information are the ammunition for successful financial trading.
Two recent trends in financial trading are community trading and algorithm trading or algo-trading. They are similar in that both use automated tools for their trading activities. The difference is in the people involved in those types of trading.
Community trading relies on groups of people sharing information, while algo-trading relies on complex mathematical formulas. Regardless both of them use trade chat because both of them requires an extensive amount of communication.
Community trading and trade chat
Community trading is a trading activity that engages a community to share data and information in a close group or circle.
In financial trading, the terms used to define the trading activity is called social trading. Social trading uses trade chat rooms and online forums heavily as their communication method. Investors, brokers, and traders communicate with trade chat to share information, share tips and tricks, and exchange trading strategy. In a more advanced form of social trading, members of a community can copy trading positions from a respected and renowned trader.
In a more advanced form of social trading, members of a community can copy trading positions from a respected and renowned trader.
This community trading has also spread to marketplaces other than the financial market. Communities formed of people with same interest are often engaged in trading activities among members. Although such a community is not targeted to be a trading community in the first place, as the community grows, the members of the community start to exchange their collections or sell their vintage collections.
This is when trading in the community begins and this is the time the trade chat will become an indispensable tool for the community.
Communities such as a manga or comic communities, gaming, music fans, and action figure communities are the ones that often integrate trading activity into their communities. These types of communities are heavy users of chat rooms and forums and as the community grows in community trading, trade chat usage becomes imminent.
Trade chat for algo-trading
Algo-trading is automated trading. Often called black-box trading, due to heavy reliance of computer, it is a form of trading that depend on computers that are programmed to follow a defined set of instructions for placing a trade in order to generate profits. The aim of using computers is to increase the speed and frequency of trading that is impossible for a human to do.
However, algo-trading has a high possibility to administer a high-frequency trading which exposes high risk and is considered controversial.
As trading positions are generated by complex mathematical algorithms, the potential of algo-trading to entrap high-frequency trading is opened.
This is because algo-trading uses computer analysis to predict a market movement using a set of complex mathematical formulas. Based on the instructions in the formula, when a certain event occurs the computer will execute a trading position.
During a high volatility market, such as what happened last week the global financial market, computers might execute excessive trading position resulting in high-frequency trades.
This is because algo-trading uses computer analysis to predict a market movement using a set of complex mathematical formulas. Based on the instructions in the formula, when a certain event occurs the computer will execute a trading position.
During a high volatility market, such as what happened last week the global financial market, computers might execute excessive trading position resulting in high-frequency trades.
Although market regulators have not declared high-frequency trading to be illegal the activity has been under scrutiny by financial authorities around the world. There are some cases in which violations occurred due to a computer decision to make a trading position such as the May 2010 Flash Crash in the Dow Jones Industrial Average.
One case of insider trading in September 2013 on the Chicago futures market occurred when a decision made by the Federal Reserve was executed by a trader in the Chicago futures market in just 2 milliseconds while someone who stood by at Washington after the announcement would have taken more than 3 milliseconds to inform traders in Chicago using a trade chat. That is a strong indication of algo-trading.
The last case was in January 2015, when exchange operators were fined by the SEC for revealing order types enabling algo-trader to execute high-frequency trading before other traders.
Trade chat in hybrid community and algo-trading
In an advanced form of social and community trading with a copy trading method, there also is a new type of trading. This is a hybrid trading, formed as a combination of community and algo-trading.
This method is called copy trading. Usually, the method is used in a trading community when a renowned trader is used as a barometer and algo-trading is employed consecutively by members of the trading community. Actually, this is the type of trading that is most prone to high-frequency trading since computers can copy other positions and execute the same strategy without communication between traders.
Trade chat is needed in this hybrid trading in order to inform all members of the community to stop trading before they engage in risky high-frequency trading.
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