Defining automated investing
Automated investing spares financial market enthusiasts the task of making investing and trading decisions. Once registered on an automated investment platform, all one has to do is provide relevant information such as financial goals and risk tolerance, and algorithms will translate it into an investment or trading strategy, which the platform will execute automatically. Available on trading and investment platforms, pre-built portfolios are an asset for the beginners in the financial markets.
Automated investment is often mentioned synonymously with robo-advisory. However, there are nuances and circles overlapping each other in that area of Fintech.
Embrace the diversity: ways to automate investing & trading
Robo-advisors do the same job as human financial advisors, but in a more efficient way in regard to the speed and scale of analysis. Given a risk preference and other relevant information, a robo-advisor allows you to invest money automatically. It gathers data and places it in a program for an algorithm to build a portfolio based on your profile. The resulting recommendation will be a basket of assets such as mutual funds, bond funds and ETFs, not individual assets.
Robo-advisors can be a suitable choice for those that seek long-term and cost-efficient financial planning. Surprisingly or not, they’ve already paved their way into the wealth management segment. Robo-advisors are also integrated in the infrastructure of such banking giants as JP Morgan and Charles Schwab.
What’s the catch?
Despite that acknowledgement, robo-advisor firms such as Wealthfront or Betterment saw their growth rates flatlined or declined for about seven years now. That is why they are slowly moving farther from pure passive investing services and increasing fees, which doesn’t exactly make their clients happy.
It’s a bit like a “Lord of the Rings” character: algorithmic trading is known under many names, such as automated trading, black-box trading, or algo-trading. Basically, it’s trading where a computer program saves you an effort by executing a preset number of instructions.
Algorithmic trading is akin to robo-advisors as it employs algorithms too. The use of algorithms enables you to backtest your strategy with historical data. However, this kind of trading can be executed manually: you just put in each order yourself. If you want to miss this part, you opt for automated instruction and execution.
What’s the catch?
Faulty algorithms or algorithmic trading software can cause significant financial losses. It can be manipulated with the same result too. That’s what caused the flash crash of 2010, when the Dow Jones Industrial Average plummeted 9%, losing $1 trillion in stock values.
“Sarao realised that the high frequency traders all used similar software. That made the market twitchy – like a flock of sheep, all moving in the same direction.
His software took advantage of this by placing thousands of orders before quickly cancelling or changing them, once he had created artificial demand for other traders to buy or sell that asset.”
— BBC about stock market trader Navinder Sarao
Still, the expansion of artificial intelligence, machine learning, and big data in the financial service sector is seen to boost the algorithmic trading market. Some world’s largest banks are already enhancing automated trading by using these technologies.
The most popular example is probably the Binance Auto-Invest. This option lets users enjoy automated crypto investment using a dollar-cost averaging (DCA) investment strategy. After choosing a crypto they’d like to trade, one needs to decide on the period of investment: one day, one or two weeks, or one month.
While filtering out the risk of getting emotional, this investment option also ensures an optimal market timing, continued earnings, and easy management.
What’s the catch?
The timing is optimal, but not perfect. So when the market seems to go up in the long term, you can miss the hit. Also, within the chosen period of time, the coin can show no sign of rising, so your purchase may result in a chain that will lead you in the red.
Such a bot is basically an automated program that executes buy and sell orders. Requiring no manual input, it executes the order when the market conditions meet the preset ones.
Bots run on real-time data and trades real time too. So, unlike robo-advisors, trading bots are created for trading sprints, not investment marathons. The emotional factor is eliminated in trading bots just like in robo-advisors.
The bot is also able to perform a series of backtesting using historical data. The backtesting helps determine the best outcome based on the market’s past performance, by showing how often a particular strategy wins.
What’s the catch?
Unexpected decisions trading bots make may lead to losses. And the poorer these bots are managed, the bigger the losses might be. As the setting-up process for the bots is nothing time-efficient, these losses might be even more disappointing. Thus the trader will be likely to consider the bots useless and feel deceived.
What to consider when creating an automated platform
The fear of scam and fraud is one reason why automation still lacks trust in investment and trading. Occasional inaccuracy that can cost much and break the low-cost investors’ dreams of easy profit is another.
When building an automated investment solution, you’ll need to address that mistrust in and inaccuracy of automated systems. You should clearly communicate what exactly the platform does, for whom the platform is suitable and to what degree it can get personalized, and what are its drawbacks. A substantial analysis and testing before the release, as well as being transparent and helpful, will minimize the risk of being accused of playing unfair. Also, you should keep in mind the potential cybersecurity risks when building the platform or assessing the vendor’s expertise, to protect your client’s and yours finances and data.
Experience, accuracy, and the highest level of security are key when building an automated investment or trading platform. We believe that too, just as our clients, who choose to stay with for as long as seven years. If you share this belief and are looking to create a robust and secure solution, we at INSART will eagerly help you with that. Drop us a line here so we can schedule a conversation together.