“Those damn Algo’s!” the frustrated /ES trader says while he’s getting chopped up on a 6 handle day. Does this imaginary trader’s frustrations have any basis in reality? Should normal Discretionary Traders be fearful of the computer programming based trading?

This article is going to answer this question and hopefully paint you a clear picture as to why. This article is based on purely qualitative data from my experience.

Defining Algorithmic Trading

Algorithmic trading is any form of trading that involves pre-programmed systems that are designed to execute trades under certain criteria, without the need for a human to make those decisions in real time.

“High-Frequency Trading” (HFT) is a common term when describing algorithmic trading.

Here’s a documentary with Haim Bodek, the whistleblower who made these shady HFT practices public:

The main attractiveness around algorithmic trading is that it removes the emotional element involved in trading. Humans are emotional creatures and are prone to making errors in their judgment.

Having a computer making calculated decisions, without emotion, can be a huge benefit. There has been some controversy, however, as to the methods and practices of Algorithmic Trading firms.

“Spoofing” is one of them.

Spoofing is the process of displaying large order to buy or sell on the price ladder to attract price towards it (we’re talking intraday here, not long-term), and then quickly removing the order before any orders get filled.

Another concern is Algorithmic Trading firms that front-runs, or “jump aheads” in line.

High-Frequency Trading firms have technology that is so quick it can see an incoming order. The firm then has programs in place to “jump ahead” in front of that order and front-run it.

This all happens in microseconds.

It’s been the cause of a lot of discussion, and frustration amongst Discretionary Traders who are trying to get their trades filled.

Defining Discretionary Trading

Discretionary Trading is best compared to what the Pit Traders did back in the day. It typically involves making trading decisions based off of data that is assimilated by a person, and executed by a person.

It’s what most average traders do. It doesn’t involve the use of computer algorithms, for the most part. Most good discretionary traders have some rules and systems in place that are designed to limit risk, and enhance upside returns.

However these rules and systems aren’t coded into a program that does all their trading for them. The traders themselves are behind the computer executing the trades manually.

While some people on the internet would have you believe that there is some black box system (Not talking about Algorithmic Trading) that can make you money each day, that’s simply not the case.

Benefits of Algorithmic Trading In The Digital Age

The main benefit that Discretionary Traders tend to overlook is that Algorithmic Trading has provided a wealth of liquidity in the markets.

While the spreads were wide enough to drive a truck through them back in the days of Pit Trading, the flood of liquidity that Algorithmic Trading has provided makes up for the nuisance it has caused the Shorter Term Traders.

The issue of front-running, in my opinion, is nothing that a Short Term Trader needs to be bothered by. In fact, I think traders should be happy that they have more liquidity to trade with.

Do Discretionary Traders Stand A Chance?

I hear a lot of Discretionary Traders whine about how Algorithmic Trading is “stealing” their money. I think these people are just crappy traders. The biggest annoyance that comes from Algorithmic Trading that cause Discretionary Traders a lot of headaches is the market chop that comes along with it.

HFT firms tend to make their money off of very, very, very small price movements. This constant shuffle of trade can be the cause for a lot of very tight ranges, and chop.

If you’ve looked at the /ES at all recently, we’ve been having less than 10 handle days. For a Discretionary Trader looking to catch intraday swings, it is very hard to trade in a 10 handle environment. To be fair, there is a number of things that go into the volatility of a market.

I think Algorithmic Trading might have something to do with it, but it certainly isn’t the whole cause behind it.

The Battle Between The Two: Who Will Ultimately Win?

I honestly don’t think that there is a real competition to start with.

Algorithmic Trading and HFT firms trade on a timeframe that is infinitesimally small. If you’re an Intraday Discretionary Trader, you are not competing against the HFT’s. You’re competing against other Intraday Traders. It’s dumb for Discretionary Traders to blame other things that are out of their control.

It’s just an excuse for a crappy trading method.

That’s just my take on it.


At the end of the day, Algorithmic Trading is here to stay. Do I think that it will totally eradicate the Discretionary Trader? Not any time soon, but you never can be certain.

Do I think Discretionary Traders should stop complaining about “those damn Algo’s”? 100%.

In fact, I think there’s some things that Discretionary Traders can learn and apply to their own trading from Algorithmic Trading if they would stop their complaining and look.

That about does it for this article. If you’d like to continue the conversation, feel free to drop us a comment below!

Thanks for reading.