Trading Bots

People regularly post on trading forums to talk about trading bots. Personally I find it a little frustrating that people try to find hidden meaning behind the bots when in reality they are just a part of the furniture of the stock market. I’ll try to outline why with this FAQ.

What is a bot?

A “bot” (short for robot) is a piece of computer software that automatically trades shares on the stock market.

How can I recognise a bot?

Bots tend to buy and sell in small parcel sizes and often try to sit first in the queue on the bid or offer. If you see lots of little trades appearing at a regular interval on a stock, it’s likely to be a bot.

A bot has appeared on stock XYZ, what does it mean?

Probably not a whole lot. In reality it means a sophisticated investor (experienced trader or investment fund) is using a bot to accumulate or exit a position and are using a bot to do this.

Aren’t bots market manipulation?

No. Bots are just a tool that some traders use to trade a stock. The trades are still valid and help determine the market price for the stock. Typically a bot will be trading in the same direction.

Are bots illegal?

No.

Why do people run bots?

The most common reason is for someone to try and reduce the impact of their trading on the market. For example, they might try and purchase 10,000 BHP at the daily VWAP. The bot would likely buy a small number of shares every 10 minutes across the whole trading day and end up with something close to the VWAP.

Who operates bots?

Bots are operated by people who have the financial incentive and technical ability to run bots. This is typically sophisticated investors such as experienced traders or investment funds.

It must cost a fortune in brokerage!

If it cost a fortune in brokerage people wouldn’t do it. Big traders on the ASX don’t pay large commissions on a per trade basis like the rest of us. Some people only pay for the total volume of trades on a given stock on a given day, rather than for each individual trade.

Can you manipulate bots?

Yes! Because bots are simple computer programs, the author may not have thought of all the possibilities and you can sometimes trick them into buying/selling your shares at a higher/lower price. Sometimes you even see two or three bots work against each other which can be quite amusing… or perhaps I’m a bit weird.

How do I write a bot?

Pay someone to do it or learn how to program a computer. You then will need a broker to execute through. The most realistic way to get started on the ASX is to open an account with Interactive Brokers and use their TWSAPI.