Gray Box Trading

The current Waters issue has an interesting article about day trading shops that are heavily using automated trading components to carry out their money making activities. Essentially — they are automating more — yet still letting the humans do a part of the work. In the past — the balance was 100% human in the beginnig — eventually we started making indicators, formulas etc and “automating” some of the human intuition of trading. At the other end of the spectrum is the “black box” no humans involved trading. Somewhere in the middle is the “gray box” where we are doing more than creating “indicators” and letting an algo execute an order elegantly — but automating more and more of the process — while allowing humans to stick around.

When consulting for individual prop traders, it was often considered a bad practice to override the system with your dirty human intervention. I can think offhand of 3 past clients. 1 client always “gray box traded” LOTS of automated system stuff — human intervention — mostly regarding exit strategy. This guy made lots of money. 2 other clients overrode their systems — “gray box style” and burned money like a bonfire. I guess I am just not clear if this is a bad thing or a good thing in general… Now that I think about it — I think even the “black box-est” hands off auto-traders I know always sometimes touch their systems for one reason or another — a much darker gray box i guess. Anyhow — I guess the day trading fiasco will continue and we will see how these folks do.

-Chris